Alicorn Consulting (Nigeria) Limited
Alicorn Consulting Limited Fundamentals Of Financial Markets National Pension Commission, Abuja March-April, 2011
[Day 1]
<ul><li>Section 1: Background to Financial Markets & Environment </li></ul><ul><li>Part A </li></ul><ul><li>The Financial ...
<ul><li>Section 1: Background to Financial Markets & Environment </li></ul><ul><li>Part B   </li></ul><ul><li>Participants...
The Financial System – at a glance Personal Corporate Government Savings = Investment Money & Capital Markets Intermediati...
The Financial System & Environment <ul><li>To understand the financial system, we start by looking at the  flow of funds  ...
<ul><li>Available funds in an economy can be transmitted to  </li></ul><ul><li>firms that require funds in  three ways : <...
Macroeconomic Variables & Nigeria Economy  …looking back and ahead
Understanding & Interpreting Macroeconomic Variables <ul><li>Key Macroeconomic Variables </li></ul><ul><ul><li>Gross Domes...
Key Economic Variables & Market Performance: 2000 – 2007   <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreig...
Key Economic Variables & Market Performance: 2008(Q4)   <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign D...
Key Economic Variables & Market Performance: 2009   <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign Direc...
Key Economic Variables & Market Performance: 2010   <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign Direc...
Key Economic Variables & Market Performance Outlook: 2011 <ul><li>Economic Growth Indicators </li></ul>? <ul><ul><li>Forei...
Understanding Fiscal & Monetary Policy
The Central Bank of Nigeria
<ul><li>Central Bank Monetary Policy reforms   </li></ul><ul><ul><li>Establishment of a new Monetary Policy Department to ...
Monetary & Fiscal Policies <ul><li>The Banking Industry: Recent Agenda </li></ul><ul><ul><li>Increased bank  capital base ...
<ul><li>Elements Of Reforms - Reserves & Exchange Rate Management </li></ul><ul><li>Full liberalisation of foreign exchang...
<ul><li>Elements Of Reforms - Reserves & Exchange Rate Management </li></ul><ul><li>Strategic Partnership between Nigerian...
Understanding the Nigerian Money & Capital Markets
Financial Institutions Financial Institutions are intermediaries that channel the savings/deposits/investments of individu...
MAJOR FINANCIAL INSTITUTIONS IN NIGERIA - Banks  -Insurance Companies -Discount Houses -Pension Funds Administrators  -Fun...
INTERMEDIATION ROLES OF FINANCIAL INSTITUTIONS IN THE FINANCIAL MARKETS Money & Capital Markets Banks  -   Accept demand, ...
Insurance Companies Receive premium payments from insured parties.  Premiums received are invested for capital preservatio...
Stock Broking Firms They buy and sell securities on a recognized Exchange on behalf of their clients. Investment Trust Com...
Break! {10.30-11.00am}
<ul><li>Section 1: Background to Financial Markets & Environment </li></ul><ul><li>Part B   </li></ul><ul><li>Participants...
Participants in the Nigerian Financial Markets  <ul><li>Regulators   Central Bank of Nigeria (CBN)   Nigeria Insurance Dep...
Financial Markets Regulatory Agencies
Financial Market Regulators  <ul><li>The Central Bank of Nigeria </li></ul><ul><ul><li>Regulates Money Market Operators mo...
Nigeria Deposit Insurance Corporation (NDIC) <ul><li>NDIC was set up to provide insurance cover for depositors in the even...
Securities & Exchange Commission (SEC) <ul><li>The Securities and Exchange Commission (“SEC”), the apex regulatory body of...
The Securities and Exchange Commission <ul><li>SEC governs the conduct of activities in the Nigerian capital market </li><...
The Nigerian Stock Exchange (an SRO) <ul><li>A Self Regulatory Organization </li></ul><ul><li>Established in 1960 as the L...
<ul><li>It provides the platform for the trading of quoted shares/stocks </li></ul><ul><li>Monitors the quotation of stock...
A financial instrument is any contract that gives rise to a  financial asset  of one entity and a  financial liability  or...
<ul><li>A  financial asset  is any asset that is: </li></ul><ul><ul><li>Cash; </li></ul></ul><ul><ul><li>an equity instrum...
<ul><li>Currency (cash) is a financial asset because it represents a medium of exchange </li></ul><ul><li>It is the basis ...
<ul><li>Financial assets represent  contractual right (obligation)  to receive (deliver) cash in the future are: </li></ul...
<ul><li>Instead of Cash exchange, another  type of financial instrument may be exchanged </li></ul><ul><li>A  Promissory n...
<ul><li>The term ‘financial instrument’ covers both financial assets and financial liabilities </li></ul><ul><li>includes ...
<ul><li>Financial Assets and Financial Liabilities </li></ul><ul><li>Financial instruments include primary instruments  </...
Features of Financial Assets and Liabilities <ul><li>Tenor greater than 10 years. </li></ul><ul><li>Coupon payments every ...
Banks’ Clearing & Settlement Systems in Nigeria
<ul><li>Section 2: Understanding & Pricing Money Market Instruments </li></ul><ul><li>Part A </li></ul><ul><li>Introductio...
Introduction to Money Market Instruments
The Role of Money Market in Financial Intermediation
Short-term Debt Instruments [Demand Deposit]
Interest Rate Bearing & Discounted Instruments <ul><li>Instruments can be either interest bearing or discounted Instrument...
Certificate of Deposits (CDs)/ Call Deposits <ul><li>Characteristics of Demand Deposits include: </li></ul><ul><ul><ul><li...
Short-term Debt Instruments [Call Deposit]
Short-term Debt Instruments [Savings Deposit]
Short-term Debt Instruments [Commercial Papers]
Commercial Papers (CPs) <ul><li>CPs are promissory notes </li></ul><ul><li>Used by bluechip companies and banks to borrow ...
<ul><li>Commercial Paper issued by a corporation with maturity T < 1 year. They are also sold at a discount, so that the i...
Short-term Debt Instruments [Bankers’ Acceptances]
Bankers’ Acceptances (BAs) <ul><li>BAs are time drafts or  bills of exchange  which are drawn on a bank and have been  acc...
Short-term Debt Instruments [Treasury Bills]
Treasury Bills: An Introduction <ul><li>Overview of Treasury Bills </li></ul><ul><li>Discount Factor Quotation </li></ul><...
Treasury Bills - Features <ul><ul><li>Short term, zero-coupon (nil interest), issued by the CBN on behalf of the FGN.  </l...
Treasury Bills – Overview Contd’ Page  <ul><ul><li>Tenor : 91 days, 182 days and 364 days </li></ul></ul><ul><ul><li>Tenor...
Treasury Bills – Overview Contd’ Page  <ul><ul><li>Yield  Price </li></ul></ul><ul><ul><li>5%    98.77 </li></ul></ul><ul>...
Treasury Bills – Overview Contd’ Page  <ul><ul><li>Hands - on </li></ul></ul><ul><ul><li>Oyinnade  invested N3million  at ...
Treasury Bills – Overview Contd’ Page  <ul><ul><li>Answer </li></ul></ul><ul><ul><li>Oyinnade  invested N3million  at the ...
Discount Factor/Price/DV/ Yield Quotation <ul><li>Discount Factor  </li></ul><ul><li>Discount Rate: 7% </li></ul><ul><li>O...
Discount Factor/Price/DV/ Yield Quotation Contd’ <ul><li>Price  </li></ul><ul><li>Price = df x 100 </li></ul><ul><li>= 0.9...
Discount Factor/Price/DV/ Yield Quotation Contd’ <ul><li>Discount Value  </li></ul><ul><li>Where Discount factor = 0.9827 ...
Discount Factor/Price/DV/ Yield Quotation Contd’ <ul><li>Yield  </li></ul><ul><li>Annualized Yield =  Discount   x  N </li...
Holding Period Yield  <ul><li>Holding Period Yield  </li></ul><ul><li>Holding Period Yield =  Sales Price – Buying Price  ...
Medium-Long Term Fixed Income [Treasury Notes]
Medium-Long Term Fixed Income [Treasury Bonds]
Repurchase Agreement [Repo]
Forward Rate Agreement & Swaps
Lunch! {2.00-3.00pm}
<ul><li>Section 2: Understanding & Pricing Money Market Instruments </li></ul><ul><li>Part B </li></ul><ul><li>Matching of...
[Day 2]
<ul><li>Section 3: Understanding & Pricing Capital Market Instruments </li></ul><ul><li>Part A </li></ul><ul><li>Understan...
Introduction  <ul><li>Common Stocks or Ordinary Shares </li></ul><ul><ul><li>Represents an ownership interest in a busines...
Introduction  <ul><li>Stockholders/Shareholders Interest </li></ul><ul><ul><li>Companies are legal entities </li></ul></ul...
Introduction  <ul><li>Stockholders/Shareholders Interest </li></ul><ul><ul><li>The  interest  in a company as recognized i...
Introduction  <ul><li>Stockholders/Shareholders Interests </li></ul><ul><ul><li>Stockholders have ultimate control over th...
Introduction  <ul><li>Stockholding/Shareholding </li></ul><ul><ul><li>The total number of shares issued and number of shar...
Introduction  <ul><li>Corporate Actions </li></ul><ul><ul><li>Shareholders in a company, as owners, are entitled to receiv...
Introduction  <ul><li>Corporate Actions </li></ul><ul><ul><li>The Board of Directors determine how much to be paid as divi...
Introduction  <ul><li>Questions </li></ul><ul><ul><li>Why is stock dividend (bonus) announcement usually associated with s...
Introduction  <ul><li>Questions </li></ul><ul><ul><li>When will stock be trading  cum dividend ? </li></ul></ul><ul><ul><l...
Introduction  <ul><li>Share price adjustment for Cash dividend </li></ul><ul><ul><li>Examples </li></ul></ul><ul><li>Share...
Introduction  <ul><li>What About Stock Split? </li></ul><ul><ul><li>For a relatively high stock price, a company can decid...
Introduction  <ul><li>What About  Stock Consolidation ? </li></ul><ul><ul><li>For a relatively high outstanding shares , a...
Introduction – Measuring Market Performance <ul><li>Index & Computation </li></ul><ul><ul><li>Index expresses the ratio be...
Introduction – Measuring Market Performance <ul><li>Stock Market Performance </li></ul><ul><ul><li>Price performance and d...
Introduction – Measuring Market Performance <ul><li>Stock Market Performance </li></ul><ul><ul><li>Price performance and d...
Introduction – Measuring Market Performance <ul><li>Stock Market Performance </li></ul><ul><ul><ul><li>The Relative Import...
Introduction – Measuring Market Performance <ul><li>Index Calculation </li></ul><ul><ul><ul><li>Price-weighted Index :  </...
Introduction – Measuring Market Performance <ul><li>Index Calculation </li></ul><ul><ul><li>Value-weighted Index :  </li><...
Introduction – Measuring Market Performance <ul><li>Index Calculation – Price-weighted and Value-weighted Examples   </li>...
Introduction – Measuring Market Performance <ul><li>The Index Divisor changes over time. </li></ul><ul><li>The Index divis...
Attributes of  Some Popular Stock Market Indices <ul><li>Price-weighted indices </li></ul><ul><ul><li>Dow Jones Industrial...
Attributes of  Some Popular Stock Market Indices Not Included value-weighted 33 stocks trading on Hong Kong Stock Exchange...
Attributes of  The NSE All-Share Index <ul><li>A Value-weighted index </li></ul><ul><li>A Price Index (excludes paid divid...
<ul><li>Understanding </li></ul><ul><li>The Nigerian Stock Exchange Daily Official List </li></ul><ul><li>( SEDOL ) Report...
<ul><li>Detailed Analysis of SEDOL </li></ul>
Break! {10.30-11.00am}
<ul><li>Part B </li></ul><ul><li>Automated Trading System (ATS) in the Nigerian Stock Exchange (NSE) </li></ul><ul><li>Sto...
The NSE & CSCS Trading Dynamics
<ul><li>  </li></ul><ul><li>The Nigerian Stock Exchange  </li></ul><ul><li>Provides the a venue for trading on capital mar...
<ul><li>  </li></ul><ul><li>Stockbrokers'  (Settlement)  Banks </li></ul><ul><li>Stockbrokers' banks can only allow Tradin...
<ul><li>  </li></ul><ul><li>Registrar Information : </li></ul><ul><li>Dematerialized certificates are re-cycled to the rel...
<ul><li>Transaction Flow </li></ul><ul><li>Transactions are now settled three days after the deal/trade date (T). </li></u...
<ul><li>  </li></ul>Transaction Cycle [T+3 ] Delivery Versus Payment (DVP) Day T.       Transactions occur on the floors o...
INVESTORS IN CSCS & TRANSACTION FLOW VIA CERTIFICATES VIA THE SECONDARY MARKET WSP Deposit certificates with NSE licensed ...
NSE-CSCS Trading Connectivity Identity Verification Broker “A” CSCS Processor Server Brokers Record Clients Record NSE Tra...
<ul><li>Transaction Flow </li></ul><ul><li>Transactions are now settled three days after the deal/trade date (T). The diag...
Netting of CSCS Trades Mechanism Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Broker “H” N...
The NSE Automated Trading System
Following the Market Trading
Placing  Sell  Instruction while Trading
Placing  Buy  Instruction while Trading
Placing  Buy & Sell  Instruction while Trading
Open Positions of  a Trader
Discovering Market by  Order Size
Discovering Market by  Stock Price
Stock Prices & Other Details
Observing Gainers & Losers
Observing Stocks Trading in  Continuous Trading State
Lunch! {2.00-3.00pm}
<ul><li>Section 4: Back Office Operations in the Nigerian Stock Market </li></ul><ul><li>Roles of Operators & Administrati...
Share Verification and Registration
<ul><li>CATEGORIES OF VERIFICATION PROCEDURES </li></ul><ul><ul><li>Verification of Signature on Transfer Forms </li></ul>...
<ul><li>All requests for securities purchase/mandate are properly logged by relationship/account managers </li></ul><ul><l...
<ul><li>What is Jobbing? </li></ul><ul><li>Jobbing Procedures </li></ul><ul><li>Interfacing Functions </li></ul><ul><li>Jo...
Documentation of Transactions
<ul><li>Core Responsibilities of the BackOffice: </li></ul><ul><ul><li>Making sure that the Company’s statements of Accoun...
<ul><li>Making sure that  returns  are accurately computed and timely payments made as required; </li></ul><ul><li>Ensurin...
<ul><li>Monitoring budgeted and actual figures and reporting variance levels to the managing director regularly and to oth...
<ul><li>Ensuring that clients have sufficient funds in stockbrokerage accounts to cover order requests and cash withdrawal...
<ul><li>Brokers report details of executed transaction to the COO, Relationship Manager and the Financial Controller of th...
<ul><li>Trade/Order execution are communicated to affected clients via Contract Notes </li></ul><ul><li>At the end of each...
<ul><li>Executed order contracts notes are prepared and forwarded to clients within 48 hours </li></ul><ul><li>Where unexe...
<ul><li>On correction or re-execution of the transaction, the client will be communicated to within 24 hours of execution ...
Operational Failures – BackOffice Challenges <ul><li>EXTERNAL </li></ul><ul><li>Natural disaster / catastrophic events / t...
Flow of Trades – the CSCS   <ul><li>  </li></ul><ul><li>The particulars in the  CSCS Account Record  forwarded by the Stoc...
<ul><li>  </li></ul><ul><li>The Nigerian Stock Exchange  </li></ul><ul><li>Provides the avenue for trading on capital mark...
<ul><li>  </li></ul><ul><li>Stockbrokers'  (Settlement)  Banks </li></ul><ul><li>Stockbrokers' banks can only allow Tradin...
<ul><li>  </li></ul><ul><li>Registrar Information : </li></ul><ul><li>Dematerialised  certificates are re-cycled to the re...
<ul><li>Transaction Flow </li></ul><ul><li>Transactions are now settled three days after the deal/trade date (T). The diag...
<ul><li>  </li></ul>Transaction Cycle [T+3 ] Delivery Versus Payment (DVP) Day T.       Transactions occur on the floors o...
<ul><li>Public Offers & Rights Processing </li></ul><ul><li>Key Steps </li></ul><ul><li>Collation  of Application Forms. <...
<ul><li>Rights Trading Procedures </li></ul><ul><li>Rights of Already listed/quoted companies   </li></ul><ul><li>Only Dea...
<ul><li>Rights Trading Procedures </li></ul>Arithmetic of Rights Trading-Case 1  (the case of 1 new share for every existi...
<ul><li>Rights Trading Procedures </li></ul>Arithmetic of Rights Trading-Case 2  (the case of 4 new shares for every exist...
Capital Appreciation <ul><li>This occurs when shares are sold at prices above the purchase prices.  </li></ul><ul><li>Posi...
How to Claim Your Dividend <ul><li>Right to claim dividend becomes imperative immediately dividend is announced. </li></ul...
Revalidation of Stalled Dividend Warrants <ul><li>After the expiration of the usual first six months, dividend warrants ca...
<ul><li>Alternatively, instruct your investment banker or stock broking house to revalidate the dividend warrant. </li></u...
Problems with Stock Investment <ul><li>Non-execution of trade on the date specified on the mandate </li></ul><ul><li>Non-a...
<ul><li>  </li></ul><ul><li>Registrars In Matters Relating To CSCS </li></ul><ul><li>In matters relating to stock market s...
Causes of the Problems identified  <ul><li>Non-execution of trade </li></ul><ul><ul><li>Stocks may not be available </li><...
<ul><li>Non-appearance of stock in CSCS account </li></ul><ul><li>Stocks normally appear on the fourth day trade is execut...
Nigerian  Stock Market – Current  Growth Drivers   <ul><li>Sectoral Drive  </li></ul><ul><li>Pricing Correlation </li></ul...
Some Important Dates in the Market <ul><li>Declaration Date </li></ul><ul><li>The Declaration Date is the date on which a ...
Placing Orders and Executing Trades <ul><li>Types of order </li></ul><ul><li>The traditional methods of orders prevalent i...
Share Registration and Management <ul><li>Register Closure </li></ul><ul><li>The company register is closed once a year fo...
Pre-CSCS Challenges <ul><li>Securities Delivery And Settlement Process Prior to CSCS </li></ul><ul><li>In most cases, it t...
<ul><li>The Central Securities Clearing System (CSCS) -  clearing and custodian agency   </li></ul><ul><li>Launched on the...
Clearing & Settlement of Securities <ul><li>Functions: </li></ul><ul><li>Central depository for share certificates of comp...
<ul><li>The objectives and functions of the CSCS </li></ul><ul><li>The CSCS provides; </li></ul><ul><li>An  integrated  ce...
Front & Back Office Management Processes
<ul><li>Interfacing with Registrars & CSCS in Transactions </li></ul><ul><li>Key Steps </li></ul><ul><li>If Share Certific...
Front Office Management Processes <ul><li>Front office   Interfacing Documents </li></ul><ul><ul><ul><li>Mandate Instructi...
<ul><li>Case of Staled Dividend Warrant (An issued warrant becomes staled is it remained un-presented  six months  after t...
<ul><li>Conditions warranting Reissuing duplicate Certificate. </li></ul><ul><ul><li>Case of stolen, lost or missing of or...
<ul><li>Procedure for Issuance of Duplicate Certificates </li></ul><ul><li>Letter of notification from the shareholder; </...
<ul><li>Procedure for Issuance of Duplicate Certificates </li></ul><ul><li>Indemnity letter must also be sealed and witnes...
RE-ISSUANCE OF UNSTALED (Less than six months) DIVIDEND WARRANTS?
[Day 3]
<ul><li>Section 5: Measuring Returns, Indicators & Valuation Methods </li></ul><ul><li>Part A </li></ul><ul><li>Computing ...
<ul><li>Section 5: Measuring Returns, Indicators & Valuation Methods </li></ul><ul><li>Part A </li></ul><ul><li>Computing ...
<ul><li>TECHNICAL </li></ul><ul><li>ANALYSIS IN EQUITIES MARKETS </li></ul>
<ul><li>Active & Passive Management </li></ul><ul><li>Both approaches to management do not completely exclude one another ...
TECHNICAL ANALYSIS <ul><ul><li>In the field of Finance, there are there exists two schools of analysts aimed at estimating...
TECHNICAL ANALYSIS  <ul><ul><li>The price of any security should reflect all the available information about such security...
TECHNICAL ANALYSIS <ul><ul><li>Why Price of security and not other data? </li></ul></ul><ul><ul><ul><li>Price incorporates...
TECHNICAL ANALYSIS S/N PRICE FIELD FIELD DESCRIPTION 1. LCLOSE This the previous day closing price of the security.   OPEN...
TECHNICAL ANALYSIS S/N PRICE FIELD FIELD DESCRIPTION 5. CHANGE The difference between the previous day closing price and t...
TECHNICAL ANALYSIS <ul><ul><li>Elements of Technical Analysis </li></ul></ul><ul><ul><ul><li>time element or the periodici...
TECHNICAL ANALYSIS <ul><li>Moving Average and its use in Technical Analysis </li></ul><ul><ul><li>A moving average is an a...
TECHNICAL ANALYSIS <ul><li>HIGHS-LOWS PRICE ANALYSIS </li></ul><ul><ul><li>A  market  momentum indicator used to determine...
TECHNICAL ANALYSIS <ul><li>VOLUME BAR CHART </li></ul><ul><ul><li>A zero-based means the bottom of each volume bar represe...
Break! {10.30-11.00am}
<ul><li>Section 5: Measuring Returns, Indicators & Valuation Methods </li></ul><ul><li>Part B </li></ul><ul><li>Valuation ...
<ul><li>Valuation of Securities </li></ul>
<ul><li>Applicable Strategies </li></ul><ul><ul><li>Intrinsic Valuation </li></ul></ul><ul><ul><li>Technical Valuation </l...
<ul><li>Absolute Valuation </li></ul><ul><ul><li>Also referred to as  Intrinsic Valuation </li></ul></ul><ul><ul><li>High ...
<ul><li>Absolute Valuation </li></ul><ul><ul><li>Discounted Cash flow valuation method </li></ul></ul><ul><ul><li>Equity P...
<ul><li>Absolute Valuation </li></ul><ul><ul><li>Discounted Cash flow valuation method </li></ul></ul><ul><li>Relative Val...
<ul><li>Valuations using this model rely on the total assets (less liabilities) value of the company </li></ul><ul><ul><li...
<ul><li>Earnings Multiples </li></ul><ul><ul><li>Look at market price as a function of the earnings per share of the busin...
<ul><li>Seeking PER </li></ul><ul><ul><li>We assume that the company is quoted/listed </li></ul></ul><ul><ul><li>Determine...
<ul><li>Revenue Multiples </li></ul><ul><ul><li>Look at market price as a function of the sale/revenue per share of the bu...
<ul><li>Deriving Multiples from Intrinsic Value </li></ul><ul><ul><li>Consider a dividend discount model for equity value ...
A company with  a required rate of return of 15%, a dividend payout of 40% with a return on equity of 18% in a market with...
<ul><li>A company has a beta of 1.2 (more volatile than the market) with an earnings growth rate of 8% and a dividend payo...
<ul><li>A company with an earnings retention rate of 55% and an implied cost of equity of 13%. Next year projected earning...
<ul><li>In favour of PE Ratio </li></ul><ul><ul><li>The only valuation provided by the NSE Official List Report (SEDOL) </...
<ul><li>Drawbacks of PE Ratio as an investment decision tool </li></ul><ul><ul><li>It disregards other valuation method – ...
<ul><li>Playing games with earnings </li></ul><ul><ul><li>Deferring expenses that should have been deducted to save taxes ...
<ul><li>In Brief </li></ul><ul><ul><li>EVA =  Operating Profit  –  costs of capital employed  to generate the earnings </l...
<ul><li>Equities Research </li></ul>
It is all about determining the  future price  of securities  today .
<ul><li>In a bullish market, every investors and speculators suddenly become analysts but a professional research analyst ...
<ul><li>This Research Report is based on information available to the public from sources we believe to be reliable, but t...
<ul><li>Know your audience/readers (this helps to determine your language level) </li></ul><ul><li>Be economical in your u...
<ul><li>Company financial accounts </li></ul><ul><li>Investors relations department/desk </li></ul><ul><li>Regulators and ...
<ul><li>Top-down: </li></ul><ul><li>The top means  the real top  and analysing the health of the global economy </li></ul>...
<ul><li>Top-down: </li></ul><ul><li>The natural extension of macro-economic analysis to perform is the review of the natio...
<ul><li>Top-down: </li></ul><ul><li>Putting together the various elements of this macro-economic analysis is important to ...
<ul><li>Top-down: </li></ul><ul><li>Final step in the macro-analysis is to analyse the major index </li></ul><ul><li>Deter...
<ul><li>Top-down: </li></ul><ul><li>In addition to  fundamental analysis ,  technical analysis  may be applied to assess t...
<ul><li>Positive features of Top-down analysis: </li></ul><ul><li>Argument often advanced is that top-down analysis allows...
<ul><li>Positive features of Top-down analysis: </li></ul><ul><li>Top-down analysis is usually the preserve of market stra...
<ul><li>Negative Features features of Top-down analysis: </li></ul><ul
Fundamentals of Financial Markets
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Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
Fundamentals of Financial Markets
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  • Value of recording data in a consistent / standard format – losses, audit, KRI’s, external events – concentrations Once set up standard categorisation, it is important to then define what you mean, with examples, so that you get a consistent interpretation. Important if rolling out program across many branches / business groups
  • 53 51 Discussing the US requirements here, but most jurisdictions follow this approach to a greater or lesser extent
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  • 61 59
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  • Transcript of "Fundamentals of Financial Markets"

    1. 1. Alicorn Consulting (Nigeria) Limited
    2. 2. Alicorn Consulting Limited Fundamentals Of Financial Markets National Pension Commission, Abuja March-April, 2011
    3. 3. [Day 1]
    4. 4. <ul><li>Section 1: Background to Financial Markets & Environment </li></ul><ul><li>Part A </li></ul><ul><li>The Financial System & Environment </li></ul><ul><li>Understanding and interpreting macroeconomic variables </li></ul><ul><li>Monetary and Fiscal Policy </li></ul><ul><li>Capital & Money Markets </li></ul><ul><li>Money & Banking System </li></ul>Training Course Outline
    5. 5. <ul><li>Section 1: Background to Financial Markets & Environment </li></ul><ul><li>Part B </li></ul><ul><li>Participants in the Nigerian Financial Markets </li></ul><ul><li>Regulatory Agencies in the Nigerian Financial Markets </li></ul><ul><li>Banks’ Clearing and Settlement Systems in Nigeria </li></ul><ul><li>Features of Financial Assets & Liabilities </li></ul>Training Course Outline
    6. 6. The Financial System – at a glance Personal Corporate Government Savings = Investment Money & Capital Markets Intermediation Personal Corporates Government Savings = Investment Corporates Government Banks Brokers Insurance/Re-Insurance
    7. 7. The Financial System & Environment <ul><li>To understand the financial system, we start by looking at the flow of funds within an economy. </li></ul><ul><li>Flow of funds describes the movement of funds or money/capital between one group of entity or institutions in the economic system and other groups. </li></ul><ul><li>Why? </li></ul><ul><li>Necessitated by the need of those who do not have enough funds for investments/production ( the deficit productive unit ) to obtain funds from those who have excess funds to spend ( the surplus spending unit ). </li></ul>
    8. 8. <ul><li>Available funds in an economy can be transmitted to </li></ul><ul><li>firms that require funds in three ways : </li></ul><ul><li>Through financial institutions that accepts savings/deposits and same make available to those needing funds for production and development. </li></ul><ul><li>Through the financial markets i.e. organized system where the suppliers and demanders of various types of funds can negotiate transactions </li></ul><ul><li>Through private arrangements/placements. </li></ul>The Financial System & Environment
    9. 9. Macroeconomic Variables & Nigeria Economy …looking back and ahead
    10. 10. Understanding & Interpreting Macroeconomic Variables <ul><li>Key Macroeconomic Variables </li></ul><ul><ul><li>Gross Domestic Products </li></ul></ul><ul><ul><li>Gross National Products </li></ul></ul><ul><ul><li>Population Size & Growth Rate </li></ul></ul><ul><ul><li>Inflation Rate </li></ul></ul><ul><ul><li>Unemployment Rate </li></ul></ul><ul><ul><li>Exchange Rate </li></ul></ul><ul><ul><li>Interest Rate </li></ul></ul><ul><ul><li>Monetary Policy Rate </li></ul></ul><ul><ul><li>Prime Lending Rate </li></ul></ul>
    11. 11. Key Economic Variables & Market Performance: 2000 – 2007 <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign Direct Investment & Foreign Portfolio Investment . </li></ul></ul><ul><ul><li>Prime lending rate </li></ul></ul><ul><ul><li>Exchange rate </li></ul></ul><ul><ul><li>Inflation rate </li></ul></ul>Population growth rate <ul><li>Market Performance Observed </li></ul><ul><ul><li>Year End Market Capitalization </li></ul></ul><ul><ul><li>NSE Index Return. </li></ul></ul>Market Dividend Yield
    12. 12. Key Economic Variables & Market Performance: 2008(Q4) <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign Direct Investment & Foreign Portfolio Investment . </li></ul></ul><ul><ul><li>Prime lending rate </li></ul></ul><ul><ul><li>Exchange rate </li></ul></ul><ul><ul><li>Inflation rate </li></ul></ul>Population growth rate <ul><li>Market Performance Observed </li></ul><ul><ul><li>Year End Market Capitalization </li></ul></ul><ul><ul><li>NSE Index Return. </li></ul></ul>Market Dividend Yield
    13. 13. Key Economic Variables & Market Performance: 2009 <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign Direct Investment & Foreign Portfolio Investment . </li></ul></ul><ul><ul><li>Prime lending rate </li></ul></ul><ul><ul><li>Exchange rate </li></ul></ul><ul><ul><li>Inflation rate </li></ul></ul>Population growth rate <ul><li>Market Performance Observed </li></ul><ul><ul><li>Year End Market Capitalization </li></ul></ul><ul><ul><li>NSE Index Return. </li></ul></ul>Market Dividend Yield
    14. 14. Key Economic Variables & Market Performance: 2010 <ul><li>Economic Growth Indicators </li></ul><ul><ul><li>Foreign Direct Investment & Foreign Portfolio Investment . </li></ul></ul><ul><ul><li>Prime lending rate </li></ul></ul><ul><ul><li>Exchange rate </li></ul></ul><ul><ul><li>Inflation rate </li></ul></ul>Population growth rate <ul><li>Market Performance Observed </li></ul><ul><ul><li>Year End Market Capitalization </li></ul></ul><ul><ul><li>NSE Index Return. </li></ul></ul>Market Dividend Yield
    15. 15. Key Economic Variables & Market Performance Outlook: 2011 <ul><li>Economic Growth Indicators </li></ul>? <ul><ul><li>Foreign Direct Investment & Foreign Portfolio Investment . </li></ul></ul>? <ul><ul><li>Prime lending rate </li></ul></ul><ul><ul><li>Exchange rate </li></ul></ul><ul><ul><li>Inflation rate </li></ul></ul>Population growth rate <ul><li>Market Performance Observed </li></ul><ul><ul><li>Year End Market Capitalization </li></ul></ul><ul><ul><li>NSE Index Return. </li></ul></ul>Market Dividend Yield
    16. 16. Understanding Fiscal & Monetary Policy
    17. 17. The Central Bank of Nigeria
    18. 18. <ul><li>Central Bank Monetary Policy reforms </li></ul><ul><ul><li>Establishment of a new Monetary Policy Department to refocus CBN on its primary (core) mandate. </li></ul></ul><ul><ul><li>Daily liquidity forecasting for effective liquidity management </li></ul></ul><ul><ul><li>Generation of daily CBN Balance Sheet </li></ul></ul><ul><ul><li>Support to National Bureau of Statistics (NBS) for timely provision of Statistics - to assist in Monetary Policy setting and implementation. </li></ul></ul><ul><li>Revamping of monetary targeting as framework for monetary policy </li></ul><ul><ul><li>Adoption of medium- term monetary policy programme </li></ul></ul><ul><ul><li>Enhanced transparency in the conduct of monetary policy </li></ul></ul><ul><ul><li>Effective Communication </li></ul></ul><ul><li>Zero tolerance to Ways and Means advances to Government at all levels. </li></ul><ul><li>Sterilisation of crude oil receipts above the benchmark price. </li></ul>Monetary & Fiscal Policies
    19. 19. Monetary & Fiscal Policies <ul><li>The Banking Industry: Recent Agenda </li></ul><ul><ul><li>Increased bank capital base from N2 billion to N25 billion through: </li></ul></ul><ul><ul><ul><li>M&A activities in the banking sector </li></ul></ul></ul><ul><ul><ul><li>injection of fresh capital via the capital market </li></ul></ul></ul><ul><ul><li>Adoption of risk-focused and rule-based regulatory framework </li></ul></ul><ul><ul><li>Automation of the banking system through e-FASS and RTGS </li></ul></ul><ul><ul><li>Establishment of an Assets Management Company as an important element of distress resolution </li></ul></ul><ul><ul><li>Corporate Governance code </li></ul></ul>
    20. 20. <ul><li>Elements Of Reforms - Reserves & Exchange Rate Management </li></ul><ul><li>Full liberalisation of foreign exchange market </li></ul><ul><li>Foreign exchange market liberalisation through ( admission of Bureaux de Change into official foreign exchange market). </li></ul><ul><li>Relatively easier access to foreign exchange by end users </li></ul><ul><li>External Management of external reserve </li></ul>Monetary & Fiscal Policies
    21. 21. <ul><li>Elements Of Reforms - Reserves & Exchange Rate Management </li></ul><ul><li>Strategic Partnership between Nigerian banks and International Asset Managers for managing Nigeria’s Foreign Exchange Reserves </li></ul><ul><li>Standardized/Uniformed checking standards and promote use of cheques </li></ul><ul><li>Promote e-payments system </li></ul><ul><li>Enforcement of Anti-Money Laundering Laws and Rules across the financial system. </li></ul>Monetary & Fiscal Policies
    22. 22. Understanding the Nigerian Money & Capital Markets
    23. 23. Financial Institutions Financial Institutions are intermediaries that channel the savings/deposits/investments of individuals, businesses and governments to productive use.   Financial Markets Made up generally of: ·        Money Markets - short-term funding Markets ·        Capital Markets - long-term funding Markets Money & Capital Markets
    24. 24. MAJOR FINANCIAL INSTITUTIONS IN NIGERIA - Banks -Insurance Companies -Discount Houses -Pension Funds Administrators -Fund Custodians -Stockbrokerage Houses -Mortgage Finance Companies Money & Capital Markets
    25. 25. INTERMEDIATION ROLES OF FINANCIAL INSTITUTIONS IN THE FINANCIAL MARKETS Money & Capital Markets Banks - Accept demand, savings and time deposits, and make loans directly to borrowers or through the financial markets . - Act as issuing houses for companies raising funds in the capital market . - Act as underwriters for new issues in the capital market
    26. 26. Insurance Companies Receive premium payments from insured parties. Premiums received are invested for capital preservation and growth.   Discount Houses Their main role is to make two-way market for Government securities. Act as underwriters for all government securities not sold in the market. Pension Funds Administrators Set up so that employees of various companies and governments agencies can make contributions and receive income after retirement. Accumulated Funds are usually invested via the financial markets.   Mortgage Finance Companies Similar to banks (take deposits and book loans) except they do not operate current accounts. They lend funds primarily to individuals and businesses for real estate mortgage loans. Funds are also invested in financial and real estates Markets. Money & Capital Markets
    27. 27. Stock Broking Firms They buy and sell securities on a recognized Exchange on behalf of their clients. Investment Trust Companies Their business is investing in the stocks and bonds of other companies and the government. Unit Trust Companies Pool funds from savers through sale of shares, and bonds issued by various businesses and governments. Create a diversified and professionally managed portfolio of securities to achieve a specified investment objective, such as capital preservation, liquidity with a high return.   Venture Capital Companies They specialize in raising funds for new business ventures.   Money & Capital Markets
    28. 28. Break! {10.30-11.00am}
    29. 29. <ul><li>Section 1: Background to Financial Markets & Environment </li></ul><ul><li>Part B </li></ul><ul><li>Participants in the Nigerian Financial Markets </li></ul><ul><li>Regulatory Agencies in the Nigerian Financial Markets </li></ul><ul><li>Banks’ Clearing and Settlement Systems in Nigeria </li></ul><ul><li>Features of Financial Assets & Liabilities </li></ul>Training Course Outline
    30. 30. Participants in the Nigerian Financial Markets <ul><li>Regulators Central Bank of Nigeria (CBN) Nigeria Insurance Deposit Corporation (NDIC) Securities & Exchange Commission (SEC) National Pension Commission (PenCom) National Insurance Commission (NIC) Operators Banks Other non-bank financial institutions Capital Markets Operators Pension Operators Insurance Companies Investors </li></ul>
    31. 31. Financial Markets Regulatory Agencies
    32. 32. Financial Market Regulators <ul><li>The Central Bank of Nigeria </li></ul><ul><ul><li>Regulates Money Market Operators mostly banks </li></ul></ul><ul><ul><li>Determines the extent to which banks can give out loans </li></ul></ul><ul><ul><li>Formulates monetary policies in line with economic dynamics </li></ul></ul><ul><ul><li>Capital and money markets returns are arguably inversely related. </li></ul></ul>
    33. 33. Nigeria Deposit Insurance Corporation (NDIC) <ul><li>NDIC was set up to provide insurance cover for depositors in the event of bank’s liquidation. </li></ul><ul><ul><ul><li>It assesses the safety of assets and soundness of our banks </li></ul></ul></ul><ul><ul><ul><li>It monitors the sale of assets of liquidating banks </li></ul></ul></ul><ul><ul><ul><li>It protects the interest of depositors </li></ul></ul></ul>
    34. 34. Securities & Exchange Commission (SEC) <ul><li>The Securities and Exchange Commission (“SEC”), the apex regulatory body of the Nigerian Capital Market derives its powers from the Investments and Securities (ISA) Act of 1999 (amended 2007). It is a government institution, which operates under the Ministry of Finance. </li></ul><ul><li>The SEC is statutorily charged with the following responsibilities: </li></ul><ul><li>Promoting and monitoring of investments in Nigeria </li></ul><ul><li>Liaison with appropriate government agencies on behalf of foreign investors </li></ul><ul><li>Advising government on the investment climate in Nigeria </li></ul><ul><li>Providing support services for potential investors </li></ul><ul><li>Negotiating incentive packages for investors </li></ul><ul><li>Issuance of guidelines regarding activities or business options open to foreign investors.  </li></ul>
    35. 35. The Securities and Exchange Commission <ul><li>SEC governs the conduct of activities in the Nigerian capital market </li></ul><ul><ul><ul><li>SEC regularly appraises the competence of capital market operators </li></ul></ul></ul><ul><ul><ul><li>Formulates relevant policies regularly </li></ul></ul></ul><ul><ul><ul><li>Registers, regulates and monitors capital raising, etc. </li></ul></ul></ul>03/29/11
    36. 36. The Nigerian Stock Exchange (an SRO) <ul><li>A Self Regulatory Organization </li></ul><ul><li>Established in 1960 as the Lagos Stock Exchange; </li></ul><ul><li>Became the Nigerian Stock Exchange in 1977; </li></ul><ul><li>Seven branches/trading floors have been established in different parts of the country – Lagos, Kaduna, Port Harcourt, Kano, Onitsha, Ibadan, Uyo, Benin, Abuja and Abeokuta. </li></ul><ul><li>The NSE is governed by a Council. The members of the Council are elected at the NSE’s Annual General Meeting </li></ul><ul><li>The functions of the Council include the following: </li></ul><ul><ul><li>Granting of quotation and listing of securities; </li></ul></ul><ul><ul><li>Formulating rules and regulations for the stock market; </li></ul></ul><ul><ul><li>Enforcing discipline among members of the Exchange; </li></ul></ul><ul><ul><li>Dealing with complaints about and amongst brokers and the investors; </li></ul></ul><ul><ul><li>Protecting investors’ interest </li></ul></ul>
    37. 37. <ul><li>It provides the platform for the trading of quoted shares/stocks </li></ul><ul><li>Monitors the quotation of stock via its Quotation Committee </li></ul><ul><li>Penalizes erring stock broking firms </li></ul><ul><li>Releases quarterly results of companies to the public </li></ul><ul><li>Liaises with SEC,CBN for the growth of the capital market. </li></ul>The Nigerian Stock Exchange
    38. 38. A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Features of Financial Assets & Liabilities
    39. 39. <ul><li>A financial asset is any asset that is: </li></ul><ul><ul><li>Cash; </li></ul></ul><ul><ul><li>an equity instrument of another entity; </li></ul></ul><ul><ul><li>a contractual right to: </li></ul></ul><ul><ul><ul><li>1. to receive cash or another financial asset from another entity </li></ul></ul></ul><ul><ul><ul><li>2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entities. </li></ul></ul></ul>Features of Financial Assets & Liabilities
    40. 40. <ul><li>Currency (cash) is a financial asset because it represents a medium of exchange </li></ul><ul><li>It is the basis on which all transactions are measured and recognized in financial statements </li></ul><ul><li>Cash deposit with a financial institution is a financial asset </li></ul><ul><li>It is the right of the depositor to obtain cash from the institution. </li></ul>Features of Financial Assets & Liabilities
    41. 41. <ul><li>Financial assets represent contractual right (obligation) to receive (deliver) cash in the future are: </li></ul><ul><li>Trade Accounts Receivable & Payable </li></ul><ul><li>Bills Receivable & Payable </li></ul><ul><li>Loans Receivable & Payable </li></ul><ul><li>Bonds receivable & Payable </li></ul><ul><li>Deposits & advances. </li></ul>Features of Financial Assets and Liabilities
    42. 42. <ul><li>Instead of Cash exchange, another type of financial instrument may be exchanged </li></ul><ul><li>A Promissory note gives the holder the contractual right to receive and the issuer the contractual obligation to deliver government bonds </li></ul><ul><li>Usually in the form of Bonds or Notes </li></ul><ul><li>The bonds represent obligations of the issuing party to pay cash. </li></ul>Features of Financial Assets and Liabilities
    43. 43. <ul><li>The term ‘financial instrument’ covers both financial assets and financial liabilities </li></ul><ul><li>includes both the most straightforward financial assets and liabilities such as trade receivables and trade payables and </li></ul><ul><li>the most complex ones such as derivatives and embedded derivatives. </li></ul>Features of Financial Assets and Liabilities
    44. 44. <ul><li>Financial Assets and Financial Liabilities </li></ul><ul><li>Financial instruments include primary instruments </li></ul><ul><ul><li>Receivables </li></ul></ul><ul><ul><li>Payables </li></ul></ul><ul><ul><li>and equity instruments) </li></ul></ul><ul><li>and derivative financial instruments </li></ul><ul><ul><li>Financial options </li></ul></ul><ul><ul><li>Futures and Forwards </li></ul></ul><ul><ul><li>Interest rate swaps </li></ul></ul><ul><ul><li>Currency Swaps. </li></ul></ul>Features of Financial Assets and Liabilities
    45. 45. Features of Financial Assets and Liabilities <ul><li>Tenor greater than 10 years. </li></ul><ul><li>Coupon payments every six months </li></ul>Bonds <ul><li>Tenor greater than One Year but less than 10 years </li></ul><ul><li>Have coupon payments every six months </li></ul><ul><li>Last payment includes coupon payment and principal </li></ul>Notes <ul><li>Tenor less than 1 year to maturity </li></ul><ul><li>Do not have any coupon payments </li></ul><ul><li>The current price is below the amount due at T, so that these are called discount bonds </li></ul><ul><li>They are the most liquid bonds </li></ul><ul><li>Bills </li></ul>Description Type
    46. 46. Banks’ Clearing & Settlement Systems in Nigeria
    47. 47. <ul><li>Section 2: Understanding & Pricing Money Market Instruments </li></ul><ul><li>Part A </li></ul><ul><li>Introduction to Money Market Instruments </li></ul><ul><li>The Role of Money Market in Financial intermediation </li></ul><ul><li>Classifying Short-term and long-term funds in the market </li></ul><ul><ul><li>Deposits & Loans </li></ul></ul><ul><ul><li>Bankers’ Acceptances & Commercial Papers </li></ul></ul><ul><ul><li>Treasury Bills </li></ul></ul><ul><ul><li>Repo (Repurchase) </li></ul></ul><ul><ul><li>Forward Rates Agreements & Swaps </li></ul></ul>Training Course Outline
    48. 48. Introduction to Money Market Instruments
    49. 49. The Role of Money Market in Financial Intermediation
    50. 50. Short-term Debt Instruments [Demand Deposit]
    51. 51. Interest Rate Bearing & Discounted Instruments <ul><li>Instruments can be either interest bearing or discounted Instrument </li></ul><ul><ul><li>Interest bearing instruments include Time Deposits Interest Bearing Certificate of Deposits (CDs) and Commercial Papers </li></ul></ul><ul><ul><li>Discounted instrument include Bankers’ Acceptances (a trade finance instrument). </li></ul></ul>
    52. 52. Certificate of Deposits (CDs)/ Call Deposits <ul><li>Characteristics of Demand Deposits include: </li></ul><ul><ul><ul><li>Time and interest rate fixed </li></ul></ul></ul><ul><ul><ul><li>Interest accrued in arrears </li></ul></ul></ul><ul><ul><ul><li>Payment annualize and paid at maturity </li></ul></ul></ul><ul><ul><ul><li>Withholding tax charged </li></ul></ul></ul><ul><ul><ul><li>Termination before end date may attract penalty </li></ul></ul></ul><ul><li>Characteristics of Time Deposits include: </li></ul><ul><ul><ul><li>Fixed interest rate </li></ul></ul></ul><ul><ul><ul><li>Tenor open-ended </li></ul></ul></ul><ul><ul><ul><li>Interest accrued in arrears </li></ul></ul></ul><ul><ul><ul><li>Payment annualized and paid at maturity </li></ul></ul></ul><ul><ul><ul><li>Withholding tax charged </li></ul></ul></ul><ul><ul><ul><li>Customer can terminate without charge but may face notice </li></ul></ul></ul>
    53. 53. Short-term Debt Instruments [Call Deposit]
    54. 54. Short-term Debt Instruments [Savings Deposit]
    55. 55. Short-term Debt Instruments [Commercial Papers]
    56. 56. Commercial Papers (CPs) <ul><li>CPs are promissory notes </li></ul><ul><li>Used by bluechip companies and banks to borrow short-term funds </li></ul><ul><li>They are usually discounted (i.e. interest is paid upfront) </li></ul><ul><li>unsecured and for periods not exceeding 180days. </li></ul><ul><li>Banks in CPs transactions are merely acting as agents </li></ul><ul><li>If the issuer does not have funds to repay on maturity, the bank is not obliged to the investor </li></ul><ul><li>Due to the relative risk of CPs to investors, the upfront interest is higher than for other instruments. </li></ul>
    57. 57. <ul><li>Commercial Paper issued by a corporation with maturity T < 1 year. They are also sold at a discount, so that the interest is paid through the appreciation in the price over the term of the bond. </li></ul><ul><li>Corporate bonds are riskier than government bonds because of the possibility of default by a corporation is larger. Default occurs when a company cannot make the payments promised to its creditors. </li></ul><ul><li>In this case the company declares bankruptcy and the bankruptcy court divides up the remaining assets of the company among the creditors following a credit priority order. </li></ul>Commercial Papers (CPs)
    58. 58. Short-term Debt Instruments [Bankers’ Acceptances]
    59. 59. Bankers’ Acceptances (BAs) <ul><li>BAs are time drafts or bills of exchange which are drawn on a bank and have been accepted by the bank indicating an unconditional promise to honour such instruments at their maturity. </li></ul><ul><li>When a bank ‘accepts’ (signs) on a BA, it has an obligation to pay the bill at maturity to any bonafide ‘holder in due course’. Likewise, the issuer has an obligation to pay the bank. </li></ul><ul><li>Like CP, BA is a discounted instrument. </li></ul><ul><li>When a bank ‘accepts’ i.e. signs on a draft or Bill of Exchange it has an obligation to pay the bill at maturity to any bonafide ‘holder in due course’. </li></ul><ul><li>The issuer has an obligation to pay the bank. Like CP, BA is a discounted instrument. </li></ul>
    60. 60. Short-term Debt Instruments [Treasury Bills]
    61. 61. Treasury Bills: An Introduction <ul><li>Overview of Treasury Bills </li></ul><ul><li>Discount Factor Quotation </li></ul><ul><li>Price Discount and Yield Quotation </li></ul><ul><li>Holding Period Return </li></ul>
    62. 62. Treasury Bills - Features <ul><ul><li>Short term, zero-coupon (nil interest), issued by the CBN on behalf of the FGN. </li></ul></ul><ul><ul><li>A Risk free instrument in that government will not default on its repayment obligation. </li></ul></ul><ul><ul><li>Issued to finance Government short-term deficit. </li></ul></ul><ul><ul><li>Features of Treasury Bills </li></ul></ul><ul><ul><li>Bearer Security or in book entry form </li></ul></ul><ul><ul><li>DMO (Debt Management Office) acts as manager and custodian </li></ul></ul><ul><ul><li>Treasury Bills are sold through Banks, Discount Houses and Selected Brokerage Firms </li></ul></ul><ul><ul><li>These Agents maintain T-Bill Account with the Central Bank for the purpose of T-Bill transaction </li></ul></ul><ul><ul><li>Transactions are done on Auction Basis and in multiple of N,1000 with Minimum investment of N10,000. </li></ul></ul>
    63. 63. Treasury Bills – Overview Contd’ Page <ul><ul><li>Tenor : 91 days, 182 days and 364 days </li></ul></ul><ul><ul><li>Tenor Bidding Settlement Frequency </li></ul></ul><ul><ul><li>90/91 Thursday Thursday Weekly </li></ul></ul><ul><ul><li>182 Wednesday Wednesday Weekly </li></ul></ul><ul><ul><li>364 Friday Friday Monthly </li></ul></ul><ul><ul><li>Bid must be submitted not later than 11:00am on day of auction and </li></ul></ul><ul><ul><li>also submitted in price quotation . On maturity of the bill, Face value </li></ul></ul><ul><ul><li>will be credited to the CBN Operating account of the PDMM with the </li></ul></ul><ul><ul><li>maturing bills in its book entry account </li></ul></ul>
    64. 64. Treasury Bills – Overview Contd’ Page <ul><ul><li>Yield Price </li></ul></ul><ul><ul><li>5% 98.77 </li></ul></ul><ul><ul><li>6% 98.52 </li></ul></ul><ul><ul><li>7% 98.27 </li></ul></ul><ul><ul><li>8% 98.03 Marginal Rate </li></ul></ul><ul><ul><li>9% 97.78 </li></ul></ul><ul><ul><li>10% 97.53 </li></ul></ul><ul><ul><li>Result: Yield 5% to 8% are successful bid while Yield 9% and 10% are </li></ul></ul><ul><ul><li>Failed bids </li></ul></ul>
    65. 65. Treasury Bills – Overview Contd’ Page <ul><ul><li>Hands - on </li></ul></ul><ul><ul><li>Oyinnade invested N3million at the just concluded 90 day T bills </li></ul></ul><ul><ul><li>Auction, quoting a yield of 5%. If the auction closed at a yield of 6% </li></ul></ul><ul><ul><li>a.) What will she part with on bid day </li></ul></ul><ul><ul><li>b.) What will be paid to her on maturity date </li></ul></ul><ul><ul><li>If she had quoted a yield of 7% </li></ul></ul><ul><ul><li>c.) What will she part with on bid day </li></ul></ul><ul><ul><li>d.) What will be paid to her on maturity date </li></ul></ul>
    66. 66. Treasury Bills – Overview Contd’ Page <ul><ul><li>Answer </li></ul></ul><ul><ul><li>Oyinnade invested N3million at the just concluded 90 day T bills </li></ul></ul><ul><ul><li>Auction, quoting a yield of 5%. If the auction closed at a yield of 6% </li></ul></ul><ul><ul><li>a.) N3million – (N3million x 6% x 90/365) = N2,955,616.44 </li></ul></ul><ul><ul><li>b.) N3million </li></ul></ul><ul><ul><li>c.) Nil </li></ul></ul><ul><ul><li>d.) Nil </li></ul></ul>
    67. 67. Discount Factor/Price/DV/ Yield Quotation <ul><li>Discount Factor </li></ul><ul><li>Discount Rate: 7% </li></ul><ul><li>Outstanding days to maturity (t): 90 </li></ul><ul><li>No of days in the year (n): 365 </li></ul><ul><li>Discount factor = 1- (d x t) </li></ul><ul><li>n </li></ul><ul><li>Discount factor = 1- (7% x 90) = 0.9827 </li></ul><ul><li>365 </li></ul>Page
    68. 68. Discount Factor/Price/DV/ Yield Quotation Contd’ <ul><li>Price </li></ul><ul><li>Price = df x 100 </li></ul><ul><li>= 0.9827 x 100 </li></ul><ul><li>= 98.27 </li></ul><ul><li>Please note that if par value of Treasury bill is N1,000, price is </li></ul><ul><li>98.27% and not N97.78 </li></ul>Page
    69. 69. Discount Factor/Price/DV/ Yield Quotation Contd’ <ul><li>Discount Value </li></ul><ul><li>Where Discount factor = 0.9827 and Face value = N100,000,000.00 </li></ul><ul><li>Discount Value (DV) = 0.9827 x 100,000,000.00 </li></ul><ul><li>= N98,270,000.00 </li></ul><ul><li>Inherent Discount = (N100,000,000 – N98,270,000) </li></ul><ul><li>= N1,730,000.00 </li></ul>Page
    70. 70. Discount Factor/Price/DV/ Yield Quotation Contd’ <ul><li>Yield </li></ul><ul><li>Annualized Yield = Discount x N </li></ul><ul><li>Discount Value T </li></ul><ul><li>Discount = N1,730,000.00 </li></ul><ul><li>Discounted Value = N98,270,000.00 </li></ul><ul><li>T = Holding Period = 90 days </li></ul><ul><li>N = Days in a year= 365 days </li></ul><ul><li>Annualized Yield = 1,730,000 x 365 = 7.14% </li></ul><ul><li> 98,270,000 90 </li></ul>Page
    71. 71. Holding Period Yield <ul><li>Holding Period Yield </li></ul><ul><li>Holding Period Yield = Sales Price – Buying Price x N </li></ul><ul><li>Buying Price T </li></ul><ul><li>SP (98.27), BP (96.88) </li></ul><ul><li>HPY = 98.27 – 96.88 x 365 = 16.89% </li></ul><ul><li>96.88 31 </li></ul><ul><li>Scenario </li></ul><ul><li>Oyinnade purchased 91 day bills @ 12.65% and sold when it was 60 days to maturity @ 7.1% </li></ul>Page
    72. 72. Medium-Long Term Fixed Income [Treasury Notes]
    73. 73. Medium-Long Term Fixed Income [Treasury Bonds]
    74. 74. Repurchase Agreement [Repo]
    75. 75. Forward Rate Agreement & Swaps
    76. 76. Lunch! {2.00-3.00pm}
    77. 77. <ul><li>Section 2: Understanding & Pricing Money Market Instruments </li></ul><ul><li>Part B </li></ul><ul><li>Matching of Funds in the Money Market </li></ul><ul><li>Managing mis-matched Funds in the Money Market </li></ul><ul><li>Dynamics of Deposit and Loans in the Money Market </li></ul><ul><li>Understanding Synthetic Deposits and Loans </li></ul><ul><li>Treatment of Dates in Financial Computation (Day Count & Annual Basis Conventions) </li></ul>Training Course Outline
    78. 78. [Day 2]
    79. 79. <ul><li>Section 3: Understanding & Pricing Capital Market Instruments </li></ul><ul><li>Part A </li></ul><ul><li>Understanding the Stock Markets and Indicators (Market Index, Sector Index, EPS, DPS, PER & Yields) </li></ul><ul><li>Understanding NSE Daily Official List </li></ul><ul><li>Part B </li></ul><ul><li>Automated Trading System (ATS) in the Nigerian Stock Market </li></ul><ul><li>Stock Trading Simulation </li></ul>Training Course Outline
    80. 80. Introduction <ul><li>Common Stocks or Ordinary Shares </li></ul><ul><ul><li>Represents an ownership interest in a business entity </li></ul></ul><ul><ul><li>Ownership interest also refers to as Residual Interest </li></ul></ul><ul><ul><li>Subordinates to all other claims </li></ul></ul>
    81. 81. Introduction <ul><li>Stockholders/Shareholders Interest </li></ul><ul><ul><li>Companies are legal entities </li></ul></ul><ul><ul><li>Stockholders have limited liability </li></ul></ul><ul><ul><li>Stockholders are the owners of companies </li></ul></ul><ul><ul><li>Ownership is therefore represented by the proportion of interest in a company. </li></ul></ul>
    82. 82. Introduction <ul><li>Stockholders/Shareholders Interest </li></ul><ul><ul><li>The interest in a company as recognized in the form of stocks/shares . </li></ul></ul><ul><ul><li>Each stock/share in a company has nominal (par value) </li></ul></ul><ul><ul><li>Typically, a company stock (share) must not sell below par. </li></ul></ul>
    83. 83. Introduction <ul><li>Stockholders/Shareholders Interests </li></ul><ul><ul><li>Stockholders have ultimate control over the company’s affairs (in theory) </li></ul></ul><ul><ul><li>In practice, interest is usually in the voting power </li></ul></ul><ul><ul><li>Voting can be in person or by proxy </li></ul></ul><ul><ul><li>Interests (shares) are normally issued as a class of shares </li></ul></ul><ul><ul><li>In some jurisdictions, companies can also issue two classes of shares (Class A and Class B). This is not the case in Nigeria. </li></ul></ul><ul><ul><li>The different classes will have different voting and/or dividend rights. </li></ul></ul>
    84. 84. Introduction <ul><li>Stockholding/Shareholding </li></ul><ul><ul><li>The total number of shares issued and number of shares outstanding (fully paid) must be the same in Nigeria. </li></ul></ul><ul><ul><li>In other jurisdictions where companies can buy back their shares, this is NOT the case. In which case shares issued may be greater than shares Outstanding. </li></ul></ul><ul><ul><li>The number of shares outstanding is a measure of free float or liquidity. </li></ul></ul><ul><ul><li>The market value of the share outstanding is referred to as the company’s Market Capitalization. </li></ul></ul>
    85. 85. Introduction <ul><li>Corporate Actions </li></ul><ul><ul><li>Shareholders in a company, as owners, are entitled to receive dividend usually in the form of cash. </li></ul></ul><ul><ul><li>Dividend payment may be quarterly, semi-annually or annually. </li></ul></ul><ul><ul><li>This is usually paid from the current earnings of the company. </li></ul></ul><ul><ul><li>Companies may also declare stock dividend in the form of Bonus . </li></ul></ul><ul><ul><li>In the case of stock dividend (bonus), the company will simply increase the number of shares outstanding (issued and fully paid). </li></ul></ul>
    86. 86. Introduction <ul><li>Corporate Actions </li></ul><ul><ul><li>The Board of Directors determine how much to be paid as dividend (having considered all pending covenants). </li></ul></ul><ul><ul><li>Shareholders can reduce but not increase the recommended amount of dividend. </li></ul></ul><ul><ul><li>A record date is usually associated with most corporate actions regarding dividend payment. </li></ul></ul><ul><ul><li>The record date is the basis of qualification or entitlement to the announced dividend (cash or stock). </li></ul></ul>
    87. 87. Introduction <ul><li>Questions </li></ul><ul><ul><li>Why is stock dividend (bonus) announcement usually associated with significant price increase? </li></ul></ul><ul><ul><li>Why is stock price adjusted for cash and stock dividend? </li></ul></ul><ul><ul><li>How is this done? </li></ul></ul>
    88. 88. Introduction <ul><li>Questions </li></ul><ul><ul><li>When will stock be trading cum dividend ? </li></ul></ul><ul><ul><li>When will it go ex dividend ? </li></ul></ul><ul><ul><li>How is this done? </li></ul></ul>
    89. 89. Introduction <ul><li>Share price adjustment for Cash dividend </li></ul><ul><ul><li>Examples </li></ul></ul><ul><li>Share price adjustment for stock dividend (Bonus) </li></ul><ul><ul><li>Examples </li></ul></ul>
    90. 90. Introduction <ul><li>What About Stock Split? </li></ul><ul><ul><li>For a relatively high stock price, a company can decide to make it more tradable for enhanced liquidity </li></ul></ul><ul><ul><li>A 3-for-1 split means that 1 ordinary share will be replaced with 3 new ordinary shares hence increasing the outstanding shares of the company </li></ul></ul><ul><ul><li>The share price will be adjusted down to one-third of the price. </li></ul></ul><ul><ul><li>The par value of the company is not affected. </li></ul></ul>
    91. 91. Introduction <ul><li>What About Stock Consolidation ? </li></ul><ul><ul><li>For a relatively high outstanding shares , a company can decide to reduce the number of shares outstanding </li></ul></ul><ul><ul><li>A 3-for-1 consolidation means that 3 ordinary shares will be replaced by 1 new ordinary shares hence reducing the outstanding shares of the company </li></ul></ul><ul><ul><li>The share price will be adjusted up by triple of the price. </li></ul></ul><ul><ul><li>The par (nominal) value of the company is not affected. </li></ul></ul>
    92. 92. Introduction – Measuring Market Performance <ul><li>Index & Computation </li></ul><ul><ul><li>Index expresses the ratio between the level of a given variable at a point relative to another level at a previous point. </li></ul></ul><ul><ul><li>The previous point serves as the base point (value) of the Index. </li></ul></ul><ul><ul><li>The base Value serves as the starting value of the Index. Typical Index values are 1; 100 and 1000 </li></ul></ul><ul><ul><li>The Index of a variable = </li></ul></ul><ul><ul><li>[Current Variable Value/Base Variable Value] * Base Value </li></ul></ul><ul><ul><li>The Index is therefore a measure of performance (growth) in a variable. </li></ul></ul>
    93. 93. Introduction – Measuring Market Performance <ul><li>Stock Market Performance </li></ul><ul><ul><li>Price performance and direction can serve to measure how stocks in the market are performing, on average. </li></ul></ul><ul><ul><li>Index computation provides a means of measuring the average stock prices from one point to the other. </li></ul></ul><ul><ul><li>The measurement can be on the basis of all stocks in the market or some selected stocks in the market. </li></ul></ul><ul><ul><li>In the case of selected stocks, there could be criteria (rules) for the selection </li></ul></ul>
    94. 94. Introduction – Measuring Market Performance <ul><li>Stock Market Performance </li></ul><ul><ul><li>Price performance and direction can serve to measure how stocks in the market are performing, on average. </li></ul></ul><ul><ul><li>Index computation provides a means of measuring the average stock prices from one point to the other. </li></ul></ul><ul><ul><li>The measurement can be on the basis of all stocks in the market or some selected stocks in the market. </li></ul></ul><ul><ul><li>In the case of selected stocks, there could be criteria (rules) for the selection </li></ul></ul><ul><ul><li>Selected stocks are included on the basis of their relative importance. </li></ul></ul>
    95. 95. Introduction – Measuring Market Performance <ul><li>Stock Market Performance </li></ul><ul><ul><ul><li>The Relative Importance of each stock can be captured on two ways: </li></ul></ul></ul><ul><ul><ul><li>Price-weighted basis </li></ul></ul></ul><ul><ul><ul><li>Value-weighted basis </li></ul></ul></ul><ul><ul><li>Price-weighted basis : </li></ul></ul><ul><ul><ul><li>The price of each stock serves as a measure of the importance of that stock in the Index. A high-priced stock has more influence than a low-priced stock. </li></ul></ul></ul><ul><ul><li>Value-weighted basis : </li></ul></ul><ul><ul><ul><li>This approach uses the market capitalization of the stocks as a measure of its contribution to the total market capitalization of the market. </li></ul></ul></ul><ul><ul><ul><li>Stocks with high market capitalization has higher influence of the Market Index. </li></ul></ul></ul><ul><ul><ul><li>Market Capitalization = (stock price) * (Issued/Outstanding shares) </li></ul></ul></ul>
    96. 96. Introduction – Measuring Market Performance <ul><li>Index Calculation </li></ul><ul><ul><ul><li>Price-weighted Index : </li></ul></ul></ul><ul><ul><ul><li>Index (I) = </li></ul></ul></ul><ul><ul><ul><li>= price of stock 1 at period t; </li></ul></ul></ul><ul><ul><ul><li>= price of stock 2 at period t </li></ul></ul></ul><ul><ul><ul><li>= price of stock 3 at period t and = Index Divisor. </li></ul></ul></ul>
    97. 97. Introduction – Measuring Market Performance <ul><li>Index Calculation </li></ul><ul><ul><li>Value-weighted Index : </li></ul></ul><ul><ul><ul><li>Index (I) = </li></ul></ul></ul><ul><ul><ul><li>= price of stock 1 at period t; = stock 1 outstanding shares </li></ul></ul></ul><ul><ul><ul><li>= price of stock 2 at period t = stock 2 outstanding shares </li></ul></ul></ul><ul><ul><ul><li>= price of stock 3 at period t = stock 3 outstanding shares </li></ul></ul></ul><ul><ul><ul><li>and = Index Divisor. </li></ul></ul></ul>
    98. 98. Introduction – Measuring Market Performance <ul><li>Index Calculation – Price-weighted and Value-weighted Examples </li></ul>100   117.8   113.3   100   Price-weighted 100   114.3   109.1   100   Value-weighted   40   44   41   40 Stock 3   20   25   26   20 Stock 2   30   37   35   30 Stock 1                   Index Price Index Price Index Price Index Price   t=3 t=2 t=1 t=0  
    99. 99. Introduction – Measuring Market Performance <ul><li>The Index Divisor changes over time. </li></ul><ul><li>The Index divisor is used to ensure continuity </li></ul><ul><li>Whenever there are changes in the outstanding shares or a removal and inclusion of new stocks in the computation, the divisor must be adjusted </li></ul><ul><li>This is the only tricky part of index computation! </li></ul>
    100. 100. Attributes of Some Popular Stock Market Indices <ul><li>Price-weighted indices </li></ul><ul><ul><li>Dow Jones Industrial Average (DJIA) </li></ul></ul><ul><ul><li>Nikkei 225 </li></ul></ul><ul><li>Value-weighted indices </li></ul><ul><ul><li>S&P 500 </li></ul></ul><ul><ul><li>FTSE 100 </li></ul></ul><ul><ul><li>CAC 40 </li></ul></ul><ul><ul><li>DAX ( Total Return Index in that dividend is included in the index computation) </li></ul></ul><ul><ul><li>HANG SENG </li></ul></ul><ul><ul><li>EUROSTOXX 50 </li></ul></ul><ul><ul><li>EUROTOP 100 </li></ul></ul><ul><li>Except DAX, all other indices are price indices – dividend excluded from the computation. </li></ul>
    101. 101. Attributes of Some Popular Stock Market Indices Not Included value-weighted 33 stocks trading on Hong Kong Stock Exchange Hang Seng Not Included price-weighted 225 stocks trading on Tokyo Stock Exchange NIKKEI 225 Not Included value-weighted 40 stocks trading on Premier Marche CAC 40 Included value-weighted 30 stocks trading on Frankfurt Stock Exchange DAX Not Included value-weighted 100 stocks trading on LSE FTSE 100 Not Included value-weighted 100 stocks trading on major markets of Europe Eurotop 50 Not Included price-weighted 30 stocks trading on NYSE & NASDAQ DJIA Not Included value-weighted 500 stocks trading on NYSE, AMEX & NASDAQ S&P 500 Dividend Weighting Components  
    102. 102. Attributes of The NSE All-Share Index <ul><li>A Value-weighted index </li></ul><ul><li>A Price Index (excludes paid dividend) </li></ul><ul><li>The NSE All-Share Index is made up of all equities quoted on the NSE Exchange. </li></ul><ul><li>The base date for the All-share index is January 3, 1984 with a given value of 100. </li></ul>
    103. 103. <ul><li>Understanding </li></ul><ul><li>The Nigerian Stock Exchange Daily Official List </li></ul><ul><li>( SEDOL ) Report </li></ul>
    104. 104. <ul><li>Detailed Analysis of SEDOL </li></ul>
    105. 105. Break! {10.30-11.00am}
    106. 106. <ul><li>Part B </li></ul><ul><li>Automated Trading System (ATS) in the Nigerian Stock Exchange (NSE) </li></ul><ul><li>Stock Trading Simulation on The NSE </li></ul>Section 3: Understanding & Pricing Capital Market Instruments
    107. 107. The NSE & CSCS Trading Dynamics
    108. 108. <ul><li>  </li></ul><ul><li>The Nigerian Stock Exchange  </li></ul><ul><li>Provides the a venue for trading on capital market securities through licensed stockbrokers </li></ul><ul><li>Checks and validates deals done on daily basis. ( Market Oversight – by SEC, NSE & CSCS ) </li></ul><ul><li>Transmits to CSCS on on-line real time basis through Automated Trading System (ATS) on transactions that occur on the floor of The Exchange. </li></ul><ul><li>At CSCS: </li></ul><ul><li>Transactions obtained from transactions on The Exchange are processed Trades Settlement: </li></ul><ul><li>Stockbrokers daily financial exposure to each other are communicated to the stockbrokers' settlement banks via diskettes supported by hard copies. </li></ul>Flow of Trades – the CSCS
    109. 109. <ul><li>  </li></ul><ul><li>Stockbrokers' (Settlement) Banks </li></ul><ul><li>Stockbrokers' banks can only allow Trading Accounts to be operated on the basis of written instructions by either the: </li></ul><ul><li>  Dealing Member who maintains the Trading Account or those contained in CSCS schedule. </li></ul><ul><li>Stockbrokers' banks can only permit Trading Accounts to be used for purposes of effecting settlement of CSCS transactions </li></ul><ul><li>The primary mode of settlement of CSCS transactions by settlement banks is by means of Inter-Bank Settlement System (NIBSS) – inter-brokers cash settlement. </li></ul>Flow of Trades (cont.)
    110. 110. <ul><li>  </li></ul><ul><li>Registrar Information : </li></ul><ul><li>Dematerialized certificates are re-cycled to the relevant registrars within 48 hours for scrutiny and retention. </li></ul><ul><li>CSCS sends data information of the changes that have taken place through buying and selling of shares to the registrars in diskettes and hard copies. </li></ul><ul><li>The registrars update registers with the stock movement details sent to the registrars in diskettes. </li></ul><ul><li>The registrars pay dividend warrants to shareholders whose names appear on the register on a day to the closure date . </li></ul>Flow of Trades (cont.)
    111. 111. <ul><li>Transaction Flow </li></ul><ul><li>Transactions are now settled three days after the deal/trade date (T). </li></ul><ul><li>The diagram below shows the transaction flow in the T+3 trading cycle. </li></ul>Transaction Day (T0) Day 1 Day 2 Day 3 Stock in pending state (in buyer’s and seller’s account). *’Not’ available for resale and not settled in buyer’s account: cannot be sold by the buyer. Stock settled in buyer’s account( seller’s account credited for stock and buyer’s account cash debited with Settlement banks) Trade took place (sold if stock is available in client’s account) Flow of Trades – the CSCS
    112. 112. <ul><li>  </li></ul>Transaction Cycle [T+3 ] Delivery Versus Payment (DVP) Day T.       Transactions occur on the floors of The Exchange without pre-funding of Trading Accounts by stockbrokers. Investors are informed. Day T +1      Stockbroking firms inform clients of purchases/shares made for them Day T+2       On or before 12 noon of Day T+2, Settlement Bank alert CSCS about the possibility of any broker’s inability to meet his financial obligation on Day T+3.   Day T+3       Account must be funded on/or before 9.00 a.m. (before clearing). for Day T transaction. Note – T- Transaction Day. Flow of Trades – the CSCS
    113. 113. INVESTORS IN CSCS & TRANSACTION FLOW VIA CERTIFICATES VIA THE SECONDARY MARKET WSP Deposit certificates with NSE licensed Stockbrokers Broker forwards relevant information (electronically) to CSCS CSCS issue CHN and Investor account to investors Stockbroker sends Certificate Deposit Form, original certificate to company registrar for verification Complete relevant KYC forms & Transfer forms: as transferor If signature okay, registrar sends verified item to CSCS for lodgment If signature or documentation error, registrar sends unverified item to stockbroker for reprocessing Complete relevant KYC forms, CSCS Shareholder Particulars Form (R005) & Transfer forms: as transferee Broker forwards relevant information (electronically) to CSCS CSCS issues CHN* and Investor account to investors *One CSCS CHN serves for multiple accounts with stockbrokers Stockbroker executes BUY mandate using Investor account number into CSCS Depository Stock settles on T+3 Days into CSCS Stockbroker forwards completed Transfer Form( Transferee) to Registrar CSCS Client info Broker info Securities info Broker “A”
    114. 114. NSE-CSCS Trading Connectivity Identity Verification Broker “A” CSCS Processor Server Brokers Record Clients Record NSE Trading Engine Broker “B” Broker “C” Broker “D” Broker “E” Brokers Record Clients Record Clients Record Securities Record Securities Record
    115. 115. <ul><li>Transaction Flow </li></ul><ul><li>Transactions are now settled three days after the deal/trade date (T). The diagram below shows the transaction flow in the T+3 trading cycle. </li></ul>Transaction Day (T0) Day 1 Day 2 Day 3 Stock in pending state (in buyer’s and seller’s account). *’Not’ available for resale and not settled in buyer’s account: cannot be sold by the buyer. Stock settled in buyer’s account( seller’s account credited for stock and buyer’s account cash debited with Settlement banks) Trade took place (sold if stock is available in client’s account) Flow of Trades – the CSCS
    116. 116. Netting of CSCS Trades Mechanism Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Dr /Cr Broker “H” NIBSS Settlement Bank “Z” Broker “F” Broker “D” Broker “B” Broker “A” Settlement Bank “Y” Settlement Bank “X” Broker “C” Broker “G” Broker “E”
    117. 117. The NSE Automated Trading System
    118. 118. Following the Market Trading
    119. 119. Placing Sell Instruction while Trading
    120. 120. Placing Buy Instruction while Trading
    121. 121. Placing Buy & Sell Instruction while Trading
    122. 122. Open Positions of a Trader
    123. 123. Discovering Market by Order Size
    124. 124. Discovering Market by Stock Price
    125. 125. Stock Prices & Other Details
    126. 126. Observing Gainers & Losers
    127. 127. Observing Stocks Trading in Continuous Trading State
    128. 128. Lunch! {2.00-3.00pm}
    129. 129. <ul><li>Section 4: Back Office Operations in the Nigerian Stock Market </li></ul><ul><li>Roles of Operators & Administrative Functions </li></ul><ul><li>Share Verification and Registration Procedures </li></ul><ul><li>Trading and Operational Processes in the Stock Market </li></ul><ul><li>Documentation of Transactions in Stockbrokerage environment </li></ul><ul><li>Clearing and Settlement of Funds and Instruments </li></ul>Training Course Outline
    130. 130. Share Verification and Registration
    131. 131. <ul><li>CATEGORIES OF VERIFICATION PROCEDURES </li></ul><ul><ul><li>Verification of Signature on Transfer Forms </li></ul></ul><ul><ul><ul><li>Confirm Signature from Application/Transfer Binder </li></ul></ul></ul><ul><ul><li>Verification of Signature on documents </li></ul></ul><ul><ul><ul><li>Use Account Number to retrieve the physical Binder or lookup the Scanned Electronic Record. </li></ul></ul></ul><ul><ul><ul><li>Compare Signature in Binder/System with Signature on Document </li></ul></ul></ul><ul><ul><li>Verification of Signatures relating to Banks, Stockbrokers & authorized signatories </li></ul></ul><ul><ul><ul><li>Check Updated Records of Banks’ Authorized Signatory Book </li></ul></ul></ul><ul><ul><ul><li>Scanned Records of Stockbrokers’ Signature Records </li></ul></ul></ul><ul><ul><ul><li>Scanned Records of Stockbrokers Accredited Representatives. </li></ul></ul></ul>Verification Procedures
    132. 132. <ul><li>All requests for securities purchase/mandate are properly logged by relationship/account managers </li></ul><ul><li>Execution of purchase mandate are made when the deposit account has been sufficiently funded to meet order request </li></ul><ul><li>When an order requesting client has less credit balance than the amount needed to meet his/her order, the account manager communicates the credit position to the accountholder for actions to be taken on the part of the client </li></ul><ul><li>In situation where a client could not be reached, the relationship manager contacts the Trader and both shall mutually agree on the units to buy that could be accommodated by the client credit balance. </li></ul>Pre-execution Funding Policy
    133. 133. <ul><li>What is Jobbing? </li></ul><ul><li>Jobbing Procedures </li></ul><ul><li>Interfacing Functions </li></ul><ul><li>Jobbing Controls </li></ul><ul><li>Challenges </li></ul>BackOffice Transaction Processing
    134. 134. Documentation of Transactions
    135. 135. <ul><li>Core Responsibilities of the BackOffice: </li></ul><ul><ul><li>Making sure that the Company’s statements of Accounts are up to date </li></ul></ul><ul><ul><li>Ensuring that the Company’s account is in line with the GAAP and in conformity to the accounting procedures put in place by the management. </li></ul></ul><ul><ul><li>Ensuring that all statutory reports are generated and forwarded in line with the requirements of relevant regulatory and compliance bodies. </li></ul></ul>BackOffice Processes & Reporting
    136. 136. <ul><li>Making sure that returns are accurately computed and timely payments made as required; </li></ul><ul><li>Ensuring that all source documents relating to all transactions are available and appropriately filed for ease of retrievals and reporting; </li></ul><ul><li>Reporting key financial figures to the management on agreed basis and highlight issues resulting thereof. </li></ul>BackOffice Processes & Reporting
    137. 137. <ul><li>Monitoring budgeted and actual figures and reporting variance levels to the managing director regularly and to other stakeholders as the needs arise; </li></ul><ul><li>Generating financials reports promptly for use by stakeholders; </li></ul><ul><li>Making sure that clients’ accounts reflect all payments and withdrawals from accounts at all time. </li></ul><ul><li>Ensuring that payments from other locations by clients are followed-up and captured to reflect clients account status. </li></ul>BackOffice Processes & Reporting
    138. 138. <ul><li>Ensuring that clients have sufficient funds in stockbrokerage accounts to cover order requests and cash withdrawals; </li></ul><ul><li>Ensuring that stockbrokerage trading account is sufficiently funded and balance communicated to traders on a daily basis; </li></ul><ul><li>Managing cash balances in the Company’s call and current accounts to ensure optimal cash management. </li></ul><ul><li>Ensuring that all accounts are reconciled on a regular basis and issues arising there from promptly communicated. </li></ul>BackOffice Processes & Reporting
    139. 139. <ul><li>Brokers report details of executed transaction to the COO, Relationship Manager and the Financial Controller of the company upon return from the NSE floor </li></ul><ul><li>Thereafter, it shall be the responsibility of each relationship manager to ensure that such transactions are captured and posted </li></ul><ul><li>Documents relating to order placement, execution and confirmation of purchase/sale are appropriately documented in both soft and hard copy in the client’s file. </li></ul>Broker Transaction Reporting
    140. 140. <ul><li>Trade/Order execution are communicated to affected clients via Contract Notes </li></ul><ul><li>At the end of each trading day, broker reports executed and unexecuted transactions to COO and Financial Controller </li></ul><ul><li>Market events, news, opportunities and unusual transactions report to the COO and Head of Research any. </li></ul>Broker Transaction Reporting
    141. 141. <ul><li>Executed order contracts notes are prepared and forwarded to clients within 48 hours </li></ul><ul><li>Where unexecuted order exist in the jobbing book, client must be notified at the close of the market for possible change in request or modification of order; </li></ul><ul><li>In cases of failed trade due to system failure or malfunction, CSCS is informed as soon as the failure is brought to the Trader’s attention; </li></ul><ul><li>In the event of error trades into client’s account with the CSCS, an acknowledged copy of the letter to CSCS informing CSCS is attached with the letter notifying the client of such errors and stating efforts being made to correct the situation; </li></ul>Broker Transaction Reporting
    142. 142. <ul><li>On correction or re-execution of the transaction, the client will be communicated to within 24 hours of execution </li></ul><ul><li>Securities are forwarded to the registrars for verification and/or lodgment </li></ul><ul><li>All certificates submitted for verification and dematerialization are photocopied and the client made to sign all copies with an attached note specifying the number of certificates collected with date of collection </li></ul><ul><li>You can verified without dematerializing. </li></ul>Broker Transaction Reporting
    143. 143. Operational Failures – BackOffice Challenges <ul><li>EXTERNAL </li></ul><ul><li>Natural disaster / catastrophic events / terrorist attacks </li></ul><ul><li>Unresponsive to legal / regulatory changes </li></ul><ul><li>Product Misuse (Guaranteed Products) </li></ul><ul><li>PEOPLE </li></ul><ul><li>Employee fraud / malice </li></ul><ul><li>Unauthorized Activity / Rogue Trader </li></ul><ul><li>Loss or lack of key personnel </li></ul><ul><li>Inadequate workplace safety </li></ul><ul><li>SYSTEMS </li></ul><ul><li>Unavailability & instability of systems </li></ul><ul><li>Inappropriate infrastructure </li></ul><ul><li>Inadequate data security and access </li></ul><ul><li>Inappropriate data usage </li></ul><ul><li>PROCESS </li></ul><ul><li>Payment / Settlement / Delivery failure </li></ul><ul><li>Documentation / Contract Risk </li></ul><ul><li>Internal / External reporting failure </li></ul>ROOT CAUSE IMPACT <ul><li>FINANCIAL </li></ul><ul><li>Direct losses </li></ul><ul><li>Indirect losses </li></ul><ul><li>Excessive re-work </li></ul><ul><li>Manual work-around </li></ul><ul><li>Loss of or damage to assets </li></ul><ul><li>Reduced employee productivity </li></ul><ul><li>BRAND </li></ul><ul><li>Customer dissatisfaction </li></ul><ul><li>Negative media publicity </li></ul><ul><li>Damaged employee morale </li></ul><ul><li>LEGAL / REGULATORY </li></ul><ul><li>Sanctions </li></ul><ul><li>Lawsuits / class action </li></ul><ul><li>Fines </li></ul><ul><li>Loss of license </li></ul>
    144. 144. Flow of Trades – the CSCS <ul><li>  </li></ul><ul><li>The particulars in the CSCS Account Record forwarded by the Stockbroker forms the database for opening client’s account and subsequent transaction update to the registrars. </li></ul><ul><li>System generated account number is taken by the CSCS system but the book-entry will in addition reflect the account details on the lodged certificates ; </li></ul><ul><li>CSCS issues Approved Certificate Deposit Forms, which certifies stockbrokers to trade. That the shares are now in the CSCS system. </li></ul><ul><li>In effect, all shares to be traded on the floors of the NSE must have their certificates verified by the relevant registrars and recorded in electronic book-entry in the Depository of CSCS for the account of the Selling Dealing Member prior to being eligible to be traded. </li></ul>
    145. 145. <ul><li>  </li></ul><ul><li>The Nigerian Stock Exchange  </li></ul><ul><li>Provides the avenue for trading on capital market securities through licensed stockbrokers </li></ul><ul><li>Checks and validates deals done on daily basis. ( Market Oversight – by SEC, NSE & CSCS ) </li></ul><ul><li>Transmits to CSCS on on-line real time basis through Automated Trading System (ATS) on transactions that occurred on the floor of The Exchange. </li></ul><ul><li>At CSCS: </li></ul><ul><li>Transactions obtained from transactions on The Exchange are processed Trades Settlement: </li></ul><ul><li>Stockbrokers daily financial exposure to each other are communicated to the stockbrokers' settlement banks via diskettes supported by hard copies. </li></ul>Flow of Trades – the CSCS
    146. 146. <ul><li>  </li></ul><ul><li>Stockbrokers' (Settlement) Banks </li></ul><ul><li>Stockbrokers' banks can only allow Trading Accounts to be operated on the basis of written instructions by either the: </li></ul><ul><li>  Dealing Member who maintains the Trading Account or those contained in CSCS schedule. </li></ul><ul><li>Stockbrokers' banks can only permit Trading Accounts to be used for purposes of effecting settlement of CSCS transactions </li></ul><ul><li>The primary mode of settlement of CSCS transactions by settlement banks is by means of Inter-Bank Settlement System (NIBSS) – inter-brokers cash settlement. </li></ul>Flow of Trades (cont.)
    147. 147. <ul><li>  </li></ul><ul><li>Registrar Information : </li></ul><ul><li>Dematerialised certificates are re-cycled to the relevant registrars within 48 hours for scrutiny and retention. </li></ul><ul><li>CSCS sends data information of the changes that have taken place through buying and selling of shares to the registrars in diskettes and hard copies. </li></ul><ul><li>The registrars update registers with the stock movement details sent to the registrars in diskettes. </li></ul><ul><li>The registrars pay dividend warrants to shareholders whose names appear on the register on a day to the closure date . </li></ul>Flow of Trades (cont.)
    148. 148. <ul><li>Transaction Flow </li></ul><ul><li>Transactions are now settled three days after the deal/trade date (T). The diagram below shows the transaction flow in the T+3 trading cycle. </li></ul>Transaction Day (T0) Day 1 Day 2 Day 3 Stock in pending state (in buyer’s and seller’s account). *’Not’ available for resale and not settled in buyer’s account: cannot be sold by the buyer. Stock settled in buyer’s account( seller’s account credited for stock and buyer’s account cash debited with Settlement banks) Trade took place (sold if stock is available in client’s account) Flow of Trades – the CSCS
    149. 149. <ul><li>  </li></ul>Transaction Cycle [T+3 ] Delivery Versus Payment (DVP) Day T.       Transactions occur on the floors of The Exchange without pre-funding of Trading Accounts by stockbrokers. Investors are informed. Day T +1      Stockbroking firms inform clients of purchases/shares made for them Day T+2       On or before 12 noon of Day T+2, Settlement Bank alert CSCS about the possibility of any broker’s inability to meet his financial obligation on Day T+3.   Day T+3       Account must be funded on/or before 9.00 a.m (before clearing). for Day T transaction. Note – T- Transaction Day. Flow of Trades – the CSCS
    150. 150. <ul><li>Public Offers & Rights Processing </li></ul><ul><li>Key Steps </li></ul><ul><li>Collation of Application Forms. </li></ul><ul><li>Reconciliation of Payment Account (s). </li></ul><ul><li>Tracing of Payments and Matching of Funds with Application Forms. </li></ul><ul><li>Making of Returns to Registrars </li></ul>
    151. 151. <ul><li>Rights Trading Procedures </li></ul><ul><li>Rights of Already listed/quoted companies </li></ul><ul><li>Only Dealing Members of the NSE are permitted to trade in rights </li></ul><ul><li>Trading in line with the Listing requirements of the NSE </li></ul><ul><li>Rights Trading must be communicated on all documents relating to the rights publication </li></ul><ul><li>Stockbrokers verify rights seller signature on transfer form & Application Form </li></ul><ul><li>A Special Market (presently non-electronic) or Callover System is created by The Exchange for rights trading while the rights is open. </li></ul><ul><li>Buyers and Sellers trade rights through brokers on the NSE floor </li></ul><ul><li>NSE note Transfer Forms of Buyer & Seller after trading and exchange of bargain slips </li></ul><ul><li>Trading in rights don’t flow through the CSCS system </li></ul>
    152. 152. <ul><li>Rights Trading Procedures </li></ul>Arithmetic of Rights Trading-Case 1 (the case of 1 new share for every existing 5 ordinary shares) At a market price of N25.48 per share while new rights issue costs N20.00, to avoid holding dilution, the combined share will cost N24.57 ((1*20.00 + 5*25.48)/6) per share. Hence the rights share is worth N4.57 (N24.57-N20.00) to qualified shareholders.
    153. 153. <ul><li>Rights Trading Procedures </li></ul>Arithmetic of Rights Trading-Case 2 (the case of 4 new shares for every existing 1 Ordinary shares) At a market price of N6.50 per share while new rights issue costs N3.50, to avoid holding dilution, the combined share will cost N4.10 ((4*3.50 + 1*6.50)/5) per share. Hence the share is worth N0.60 (N4.10-N3.50) to qualified shareholders.
    154. 154. Capital Appreciation <ul><li>This occurs when shares are sold at prices above the purchase prices. </li></ul><ul><li>Positive economic development can engender this. e.g. favourable business environment </li></ul><ul><li>It is a sign of economic boom </li></ul><ul><li>The closure date which is the day when a company’s register is closed tends to impact positively on capital appreciation. </li></ul>
    155. 155. How to Claim Your Dividend <ul><li>Right to claim dividend becomes imperative immediately dividend is announced. </li></ul><ul><li>Investors can either wait till the dividend warrants get to their residences or instruct their broking firms to get them from the registrars on their behalf. </li></ul>
    156. 156. Revalidation of Stalled Dividend Warrants <ul><li>After the expiration of the usual first six months, dividend warrants can be revalidated either personally or through your stock broking firms. </li></ul><ul><li>Personally, all you need do is to visit the registrar to the company with the warrants for renewal. </li></ul>
    157. 157. <ul><li>Alternatively, instruct your investment banker or stock broking house to revalidate the dividend warrant. </li></ul><ul><li>Most companies , in addition to the annual reports and accounts, publish the list of unclaimed dividend warrants. </li></ul><ul><li>Investors are enjoined to always go through this list to effectively monitor their investments. </li></ul>
    158. 158. Problems with Stock Investment <ul><li>Non-execution of trade on the date specified on the mandate </li></ul><ul><li>Non-appearance of the stock (s) already in the client’s CSCS account </li></ul><ul><li>Non-arrival of dividend warrants, bonus certificates, AGM/EGM notice. </li></ul>
    159. 159. <ul><li>  </li></ul><ul><li>Registrars In Matters Relating To CSCS </li></ul><ul><li>In matters relating to stock market securities trading, the registrars are to deal only with the stock broking firms acting on behalf of investors/shareholders. </li></ul><ul><li>Verifies/authenticates investors claims (i.e. certificates and transfer forms) as presented through the stockbroking firm . </li></ul><ul><li>Sends verified certificate(s) and the signed Transfer Form(s) with two (2) copies of certificate deposit form(s) to the depository of CSCS within 48 hours. </li></ul>Share Registration & Verification
    160. 160. Causes of the Problems identified <ul><li>Non-execution of trade </li></ul><ul><ul><li>Stocks may not be available </li></ul></ul><ul><ul><li>Price indicated on the mandate may be outside the range of the prevailing market price </li></ul></ul><ul><ul><li>To maximize investors’ wealth in case of likely future fall in price </li></ul></ul><ul><ul><li>Industry development that could affect price direction. </li></ul></ul>
    161. 161. <ul><li>Non-appearance of stock in CSCS account </li></ul><ul><li>Stocks normally appear on the fourth day trade is executed. </li></ul><ul><li>It could be a technical problem from CSCS </li></ul><ul><li>Notification should be sent to CSCS with the necessary document. </li></ul>
    162. 162. Nigerian Stock Market – Current Growth Drivers <ul><li>Sectoral Drive </li></ul><ul><li>Pricing Correlation </li></ul><ul><li>New inflow of funds </li></ul><ul><ul><li>PFAs Participation </li></ul></ul><ul><ul><li>Reduced Leveraged Costs </li></ul></ul><ul><ul><li>Foreign Indirect Portfolio Investments </li></ul></ul><ul><li>Recent Liquidity Improvement </li></ul><ul><li>Information-induced Pricing </li></ul><ul><li>Increased Volatility(profit taking, loss cutting) </li></ul>
    163. 163. Some Important Dates in the Market <ul><li>Declaration Date </li></ul><ul><li>The Declaration Date is the date on which a firm's board of directors issues a statement declaring a dividend.  </li></ul><ul><li>Holder-Of-Record Date  </li></ul><ul><li>This is the date on which the company opens the ownership books to determine who will receive the benefit(s). Note that adjustment is made on the closure date . Shareholders who bought on the closure date at the closure price are not entitled to benefit(s).   </li></ul><ul><li>Ex-Dividend /Ex-Script Date </li></ul><ul><li>This is the date on which the right to the next dividend no longer accompanies a stock.    </li></ul>
    164. 164. Placing Orders and Executing Trades <ul><li>Types of order </li></ul><ul><li>The traditional methods of orders prevalent in most exchanges are present on the NSE i.e. market orders, limit orders, time orders and stop orders. </li></ul><ul><li>Most orders are executed on the Exchange as market orders. </li></ul><ul><li>Trading suspensions </li></ul><ul><li>Developments within a quoted company in which brokers might require more information from the company prior to making investment decisions. </li></ul><ul><li>When there is an investigation into the affairs of a quoted company. </li></ul><ul><li>Technical suspension </li></ul><ul><li>During a public offering of the shares of the company, the quoted company will be on technical suspension from when application for the public offering is filed with the NSE to the listing date of the offer. </li></ul>
    165. 165. Share Registration and Management <ul><li>Register Closure </li></ul><ul><li>The company register is closed once a year for the purposes of payment of dividends and the issuance of share certificates (script). </li></ul><ul><li>The register is closed on the date announced by the company . </li></ul><ul><li>Sale of Shareholding </li></ul><ul><li>A shareholder can sell his holdings as soon as they are purchased, as long as he waives his right to hold a certificate, on the certificate waiver/option form R005. </li></ul><ul><li>When an investor opts for a certificate, he forfeits his rights to sell, until a certificate has been issued, verified and deposited at the CSCS depository. </li></ul><ul><li>CSCS Statement of Shareholding </li></ul><ul><li>A shareholder can obtain a statement as often he requires - for a fee from the CSCS or through his stockbroker. </li></ul>
    166. 166. Pre-CSCS Challenges <ul><li>Securities Delivery And Settlement Process Prior to CSCS </li></ul><ul><li>In most cases, it took between 3 months - 12 months to receive Share Certificates  </li></ul><ul><li>Cancellation and frequent issuance and re-issuance of Certificates when sales occur (increased cost!) </li></ul><ul><li>Constant signature verification </li></ul><ul><li>Capital Gains advantage not exploited </li></ul><ul><li>Some Dealing Members sold what they did not have (“ Short Selling ”) </li></ul><ul><li>Numerous complaints on failed transactions </li></ul><ul><li>Loss of Certificates </li></ul><ul><li>Risk was high - undue delay, manually operated, manipulations due to long transaction cycle, minimal transparency, therefore general lack of trust in the system. </li></ul>
    167. 167. <ul><li>The Central Securities Clearing System (CSCS) - clearing and custodian agency </li></ul><ul><li>Launched on the 14 th of April 1997 </li></ul><ul><li>before then, Delivery/Settlement was done on a rolling, manual T + 7 basis </li></ul><ul><li>Introduction of the CSCS reduced Delivery/Settlement period to T + 5 </li></ul><ul><li>T+3 system was introduced in April year 2000 </li></ul><ul><li>T+1 to commence on full implementation of remote trading. </li></ul><ul><li>Objectives of setting up CSCS </li></ul><ul><li>To minimize the bottlenecks associated with the transfer of shares </li></ul><ul><li>To reduce the production cost of issuing new certificates for traded securities </li></ul><ul><li>To eliminate the manual processing of transactions done on the floor of The Exchange . </li></ul>Clearing & Settlement of Securities
    168. 168. Clearing & Settlement of Securities <ul><li>Functions: </li></ul><ul><li>Central depository for share certificates of companies quoted on The Nigerian Stock Exchange.  </li></ul><ul><li>Sub-registry for all quoted securities (in conjunction with registrars of quoted companies) </li></ul><ul><li>Issuer of central securities identification numbers to stockbrokers and investors. </li></ul><ul><li>Clearing and settlement of transactions. </li></ul><ul><li>Safe Keeping/Custodian (in conjunction with custodian member(s) for local and foreign instruments) </li></ul><ul><li>Other functions. </li></ul>
    169. 169. <ul><li>The objectives and functions of the CSCS </li></ul><ul><li>The CSCS provides; </li></ul><ul><li>An integrated central depository, clearing (electronic/book-entry transfer of shares from seller to buyer) and settlement (payment for bought securities) for all stock market transactions (DVP enabler). </li></ul><ul><li>A sub-registry where all securities listed on the NSE. </li></ul><ul><li>The CSCS is responsible for updating company register of members and issuing statement of holdings . The new T+ 3 system is now fully implemented. </li></ul><ul><li>CSCS Settlement Banks (Stockbrokers’ Banks) </li></ul><ul><li>All stock broking firms are required to open one trading account , to facilitate settlement of trades, in any one of selected banks. </li></ul>Clearing & Settlement of Securities
    170. 170. Front & Back Office Management Processes
    171. 171. <ul><li>Interfacing with Registrars & CSCS in Transactions </li></ul><ul><li>Key Steps </li></ul><ul><li>If Share Certificates are verified okay by the registrar, </li></ul><ul><ul><li>The verified items are forwarded directly to CSCS by the Registrar </li></ul></ul><ul><ul><li>Items are posted into investor’s account under the stock broking firm for trading </li></ul></ul><ul><li>Transfer forms of Buyers are forwarded to the CSCS by stockbroker for delivery to the Registrar </li></ul><ul><li>Transaction data are regularly forwarded to the Registrar by the CSCS </li></ul><ul><li>Registrar uses the data from the CSCS to update register of members record. </li></ul>
    172. 172. Front Office Management Processes <ul><li>Front office Interfacing Documents </li></ul><ul><ul><ul><li>Mandate Instructions from Shareholders & Stockbrokers </li></ul></ul></ul><ul><ul><ul><li>Letter of Authority to Act </li></ul></ul></ul><ul><ul><ul><li>Bankers Confirmation from Shareholders </li></ul></ul></ul><ul><ul><ul><li>Request for consolidation and/or merger of accounts </li></ul></ul></ul><ul><ul><ul><li>Power of Attorney </li></ul></ul></ul><ul><ul><ul><li>Indemnity Letter from Stockbrokers </li></ul></ul></ul><ul><ul><ul><li>Transfer Forms </li></ul></ul></ul><ul><ul><ul><li>Letters relating to Change of Address/name or complaints and notification. </li></ul></ul></ul>The First task is the verification of the signature on all documents!
    173. 173. <ul><li>Case of Staled Dividend Warrant (An issued warrant becomes staled is it remained un-presented six months after the issue date). </li></ul><ul><li>System confirmation to ensure that it remains unpaid; </li></ul><ul><li>Cancellation of payment date printed on the warrant; </li></ul><ul><li>The date of cancellation is now written on the warrant; </li></ul><ul><li>The warrant is now signed (by authorized signatory) and stamped; </li></ul><ul><li>The warrant now remains valid for a period of another six months . </li></ul>Unclaimed Dividend Warrants Revalidation
    174. 174. <ul><li>Conditions warranting Reissuing duplicate Certificate. </li></ul><ul><ul><li>Case of stolen, lost or missing of original certificate </li></ul></ul><ul><ul><li>Case of mutilated /defaced or unreadable certificate </li></ul></ul><ul><ul><li>Awareness of Cloned Certificate (s) in circulation. </li></ul></ul>Re-issuance of Duplicate Certificate to a Shareholder
    175. 175. <ul><li>Procedure for Issuance of Duplicate Certificates </li></ul><ul><li>Letter of notification from the shareholder; </li></ul><ul><li>Confirmation/verification of shareholder signature from shareholder record and shares remain unsold ; </li></ul><ul><li>A letter of Indemnity (indemnifying the Company’s directors and the Registrar ) is then issued to the shareholder; </li></ul><ul><li>Upon execution of the indemnity letter, confirm the signature of the executing bank (or insurance company) </li></ul>Re-issuance Of Duplicate Certificate To A Shareholder
    176. 176. <ul><li>Procedure for Issuance of Duplicate Certificates </li></ul><ul><li>Indemnity letter must also be sealed and witnessed; </li></ul><ul><li>New certificate is then issue and logged into the system </li></ul><ul><li>Dispatch new certificate to the company secretary for signature and seal; </li></ul><ul><li>Send re-issue certificate to the shareholder. </li></ul>Re-issuance of Duplicate Certificate to a Shareholder
    177. 177. RE-ISSUANCE OF UNSTALED (Less than six months) DIVIDEND WARRANTS?
    178. 178. [Day 3]
    179. 179. <ul><li>Section 5: Measuring Returns, Indicators & Valuation Methods </li></ul><ul><li>Part A </li></ul><ul><li>Computing Stocks & Market Index Returns, Beta & Annual Volatility </li></ul><ul><li>Technical Analysis in the Equities Market </li></ul><ul><li>Part B </li></ul><ul><li>Valuation of Equities </li></ul><ul><li>Ratio Analysis in the Equities Market </li></ul>Training Course Outline
    180. 180. <ul><li>Section 5: Measuring Returns, Indicators & Valuation Methods </li></ul><ul><li>Part A </li></ul><ul><li>Computing Stocks & Market Index Returns, Beta & Annual Volatility </li></ul>
    181. 181. <ul><li>TECHNICAL </li></ul><ul><li>ANALYSIS IN EQUITIES MARKETS </li></ul>
    182. 182. <ul><li>Active & Passive Management </li></ul><ul><li>Both approaches to management do not completely exclude one another </li></ul><ul><li>For portfolio managers reconciling the two requires understanding both market and investor behaviour </li></ul><ul><li>Two extremes of market behaviour propose: </li></ul><ul><ul><li>Efficient Market Hypothesis (EMH) states that all relevant information is impounded in market prices – stock picking is futile exercise </li></ul></ul><ul><ul><li>Market inefficiency where professional money managers are able to exploit short run advantages in sources and impounding of market information. </li></ul></ul>Efficient Markets Hypothesis
    183. 183. TECHNICAL ANALYSIS <ul><ul><li>In the field of Finance, there are there exists two schools of analysts aimed at estimating securities prices – fundamental and technical analysts. </li></ul></ul><ul><ul><li>Fundamental analysts seek to determine security price by analyzing financial data (corporate accounts) on the company. </li></ul></ul><ul><ul><li>Technical analysts concentrate on the use of historical price and volume data to improve or enhance investment decision of what future price to buy or sell financial instruments. </li></ul></ul><ul><ul><li>Who is better at determining share price? </li></ul></ul>
    184. 184. TECHNICAL ANALYSIS <ul><ul><li>The price of any security should reflect all the available information about such security. </li></ul></ul><ul><ul><li>Available information will include company financials data, management information, corporate actions, quarterly announcement, industry news and government policy thrusts. </li></ul></ul><ul><ul><li>In a market that is perfectly efficient, it is assumed that all available data and information have been incorporated into the security price and that all investors have access to the information. </li></ul></ul>
    185. 185. TECHNICAL ANALYSIS <ul><ul><li>Why Price of security and not other data? </li></ul></ul><ul><ul><ul><li>Price incorporates consensus and expectations of the investors i.e. buyers and sellers must agree to a price based on their expectation of future price of the security. </li></ul></ul></ul><ul><ul><ul><li>Sellers expect the price to fall while the buyers expect the price to rise in the future. </li></ul></ul></ul><ul><ul><ul><li>Expectation therefore is a major determinant of price action of any security. </li></ul></ul></ul><ul><ul><li>How accurately can we price this expectation? </li></ul></ul><ul><ul><ul><li>Given that investors in most markets are of diverse background with diverse emotions, fears, greed levels, investment needs and market knowledge, it is impossible to aggregate and quantify these expectations in order to know the implications on price action. </li></ul></ul></ul><ul><ul><ul><li>Not accurate . Our inability to determine with accuracy what the consensus price should be. </li></ul></ul></ul><ul><ul><ul><li>Researches in the field of Behavioral finance are currently examining these human factors. </li></ul></ul></ul>
    186. 186. TECHNICAL ANALYSIS S/N PRICE FIELD FIELD DESCRIPTION 1. LCLOSE This the previous day closing price of the security.   OPEN This represents the first trade done at the open of the market. The consensus price agreed upon by two or more traders as orders begin to be matched. 2. HIGH The highest price for which brokers traded the security during a trading session. The maximum price should not exceed 5 per cent of the previous day closing price . This is also the highest price at which any buyer was willing to buy during the trading session (resistance beyond this point). 3. LOW The lowest point at which brokers traded the security during the session. The lowest price should not be less than 5 per cent below previous day closing price . This also represented the lowest point sellers were willing to consummate trades with buyers in the market. 4. CLOSE The last price at which buyer(s) and seller(s) consummated a trade just before the close of the trading session. This is the price often reported to the investing public by the media!
    187. 187. TECHNICAL ANALYSIS S/N PRICE FIELD FIELD DESCRIPTION 5. CHANGE The difference between the previous day closing price and today closing price. This change should be within the band of –5.0% and +5.0% of the previous day closing price. 6. DEALS/TRADES This is the number of deals carried out between buyers and sellers during the trading session. Note that deals are counted on the basis of trading between clients’ accounts and not on broker basis – a broker can be a buyer and seller simultaneously using different accounts (case of cross deals). 7. VOLUME This is the total number of security (shares) traded during the trading session. 8. VALUE This is the value of trade carried out on a security during the trading session. Always difficult to determine on the face of the price report.
    188. 188. TECHNICAL ANALYSIS <ul><ul><li>Elements of Technical Analysis </li></ul></ul><ul><ul><ul><li>time element or the periodicity of these parameters is equally very important.   </li></ul></ul></ul><ul><ul><ul><li>Time being continuous while these parameters are discrete therefore requires that we first determine the periodicity of the parameters in any technical analysis exercise. </li></ul></ul></ul><ul><ul><ul><li>The periodicity of time dependent parameters simply refers to the intervals between which the parameters are measured or captured. Irrespective of the chosen interval (per second, hourly, daily, weekly, monthly, yearly etc.) the basic principle of technical analysis always holds.   </li></ul></ul></ul>
    189. 189. TECHNICAL ANALYSIS <ul><li>Moving Average and its use in Technical Analysis </li></ul><ul><ul><li>A moving average is an average value of security’s price over a specified period of time. Changes in the average security’s prices will change the moving average prices. </li></ul></ul><ul><li>Calculating Simple Moving Average </li></ul><ul><ul><li>Add the closing price of the security most recent prices for a number of the period (e.g. 5 days) then divide by the number of time period i.e. Sum (n-most recent data)/n </li></ul></ul>Speculative/day Trading 5-12 days Short Term Trading 14-25 days Medium Term 25-100 days Long Term 100-200 days
    190. 190. TECHNICAL ANALYSIS <ul><li>HIGHS-LOWS PRICE ANALYSIS </li></ul><ul><ul><li>A market momentum indicator used to determine the cumulative total of the differences between the total number of stocks attaining new highs and new lows within a specified period – usually 52 weeks. </li></ul></ul><ul><ul><li>i.e. Current H-L value = (New Highs – New Lows) + Previous day H-L </li></ul></ul><ul><li>Similar to the market index (e.g. NSE All-Share Index), use the indicator to determine market trend. </li></ul><ul><ul><li>A reversal of the direction of this indicator from that of the market index usually portend a likely reversal of the market direction or market correction.  </li></ul></ul><ul><ul><li>A plot of the All-Share Index juxtaposed with the Highs-Lows is a strong indication of the market direction, going forward i.e. divergence during an uptrend market (measure by the index) indicate an approaching bearish market. The reverse also holds in a downtrend market. </li></ul></ul>
    191. 191. TECHNICAL ANALYSIS <ul><li>VOLUME BAR CHART </li></ul><ul><ul><li>A zero-based means the bottom of each volume bar represents the value of zero. A relative-adjusted is done by subtracting the lowest volume that occurred during the period from all of the volume bars. </li></ul></ul><ul><li>SUPPORT AND RESISTANCE </li></ul><ul><ul><li>Support is a price action at which buyers see investment in a share price as being worthwhile and at point in which sellers were not willing to sell for less than the support price. At the Support point, buyers are actually supporting the share price. </li></ul></ul><ul><ul><li>Resistance level is the point at which sellers take control of prices and prevent share price from rising higher. </li></ul></ul>
    192. 192. Break! {10.30-11.00am}
    193. 193. <ul><li>Section 5: Measuring Returns, Indicators & Valuation Methods </li></ul><ul><li>Part B </li></ul><ul><li>Valuation of Equities </li></ul><ul><li>Ratio Analysis in the Equities Market </li></ul>
    194. 194. <ul><li>Valuation of Securities </li></ul>
    195. 195. <ul><li>Applicable Strategies </li></ul><ul><ul><li>Intrinsic Valuation </li></ul></ul><ul><ul><li>Technical Valuation </li></ul></ul><ul><ul><li>Relative Valuation </li></ul></ul><ul><ul><li>Private Information </li></ul></ul><ul><li>Which method deliver superior return in the long-run? </li></ul>Active Asset Selection
    196. 196. <ul><li>Absolute Valuation </li></ul><ul><ul><li>Also referred to as Intrinsic Valuation </li></ul></ul><ul><ul><li>High amount of assumptions must be made with regards to the variables under consideration. </li></ul></ul><ul><li>Relative Valuation </li></ul><ul><ul><li>Less assumptions with regards to the variables under consideration. </li></ul></ul>Absolute & Relative Valuation
    197. 197. <ul><li>Absolute Valuation </li></ul><ul><ul><li>Discounted Cash flow valuation method </li></ul></ul><ul><ul><li>Equity Price=P o = DPS/(K e – gn) </li></ul></ul><ul><ul><ul><li>DPS = expected future (next) year dividend per share </li></ul></ul></ul><ul><ul><ul><li>K e = cost of equity </li></ul></ul></ul><ul><ul><ul><li>G n = expected growth rate </li></ul></ul></ul><ul><li>Tricky! We must make assumptions with regards to DPS and g n . </li></ul><ul><ul><li>Compare computed equity price (Po) to price in the market </li></ul></ul><ul><ul><li>Computed equity price (P o ) > price in the market => stock undervalued in the market </li></ul></ul><ul><ul><li>Computed equity price (P o ) < price in the market => stock overvalued in the market </li></ul></ul>Absolute (Intrinsic) Valuation
    198. 198. <ul><li>Absolute Valuation </li></ul><ul><ul><li>Discounted Cash flow valuation method </li></ul></ul><ul><li>Relative Valuation( relative to market price) </li></ul><ul><ul><li>Relative to generated Earnings (Earnings Multiple) </li></ul></ul><ul><ul><li>Relative to Book value (or replacement cost) </li></ul></ul><ul><ul><li>Relative to generated Revenue (Revenue Multiple) </li></ul></ul>Methods – Absolute & Relative Valuation
    199. 199. <ul><li>Valuations using this model rely on the total assets (less liabilities) value of the company </li></ul><ul><ul><li>Accountants valuation of business – based on earnings and book value </li></ul></ul><ul><ul><li>Dependent on the original cost of assets </li></ul></ul><ul><ul><li>Subject to accounting adjustments </li></ul></ul><ul><li>This valuation model compares the equity market price with the book value of business equity assets to confirm over-valuation or under-valuation of equity price. </li></ul><ul><li>For corporate valuation, compare the book value of all assets to the value of the business. </li></ul>Asset Based Methods
    200. 200. <ul><li>Earnings Multiples </li></ul><ul><ul><li>Look at market price as a function of the earnings per share of the business </li></ul></ul><ul><ul><li>Price-Earnings ratio </li></ul></ul><ul><ul><li>Market Price/Earnings-per-share </li></ul></ul><ul><ul><li>Number of times that EPS is repeated in the market price (2X, 3X….NX) </li></ul></ul><ul><li>However, what earnings should we consider? </li></ul><ul><ul><li>Current/historical earnings ( trailing earnings ) or </li></ul></ul><ul><ul><li>Forecast/future earnings ( forward earnings ) ? </li></ul></ul><ul><li>Always, compare similar PER type in line with the earnings </li></ul><ul><li>Is a lower PER better than a high PER? </li></ul><ul><ul><li>Yes but not always! </li></ul></ul><ul><li>A high growth company will have a high PER – future priced into the share price </li></ul><ul><li>Any business prone to being acquired (at a premium) will have a high PER. </li></ul>Relative Valuation – Earning Multiples
    201. 201. <ul><li>Seeking PER </li></ul><ul><ul><li>We assume that the company is quoted/listed </li></ul></ul><ul><ul><li>Determine Net Earnings of the business </li></ul></ul><ul><ul><li>Compute Net earnings per share (outstanding shares in issue) </li></ul></ul><ul><ul><li>Net Earnings – (after tax & interest payment but before dividend) </li></ul></ul><ul><ul><li>Not Profit After Tax as commonly use </li></ul></ul><ul><ul><li>EPS – Net earnings dividend by outstanding shares </li></ul></ul><ul><ul><li>PER – market price dividend by EPS </li></ul></ul><ul><ul><li>How many times in the company earnings replicated in the share price? 2X, 3X,….Nx multiples </li></ul></ul><ul><ul><li>Note: 1. only compare PERs of companies in the same industry/sector </li></ul></ul><ul><ul><li>2. Give consideration to their sources of earnings. </li></ul></ul>Valuation – Earnings Basis
    202. 202. <ul><li>Revenue Multiples </li></ul><ul><ul><li>Look at market price as a function of the sale/revenue per share of the business </li></ul></ul><ul><ul><li>Price-Sale ratio </li></ul></ul><ul><ul><li>Market Price/Sale-per-share </li></ul></ul><ul><ul><li>Number of times that the sale-per-share is repeated in the market price (2X, 3X….NX) </li></ul></ul><ul><li>Advantages of using Revenue multiples </li></ul><ul><ul><li>Revenue/Sale figures are less affected by accounting rules and principles </li></ul></ul><ul><ul><li>Comparison across industries becomes more reliable under this valuation method. </li></ul></ul>Relative Valuation – Revenue Multiples
    203. 203. <ul><li>Deriving Multiples from Intrinsic Value </li></ul><ul><ul><li>Consider a dividend discount model for equity value = P o = DPS 1 /(K e – G n ) </li></ul></ul><ul><ul><li>Divide equation by earnings figure </li></ul></ul><ul><ul><li>For a forward-looking earnings valuation </li></ul></ul><ul><ul><ul><li>P o /EPS 1 = PER = DPS 1 /EPS 1 . 1/(Ke – Gn) </li></ul></ul></ul><ul><ul><ul><li>= Dividend-payout-ratio * 1/(K e – G n ) </li></ul></ul></ul><ul><ul><li>For a trailing earnings valuation </li></ul></ul><ul><ul><ul><li>P o /EPS 0 = PER = DPS 1 /EPS 0 . 1/(K e – G n ) </li></ul></ul></ul><ul><ul><ul><ul><li>= DPS 0 (1+G n )/EPS 0 . 1/(K e – G n ) </li></ul></ul></ul></ul><ul><ul><li>= DPS 0 /EPS 0 * (1+G n )/(K e – G n ) </li></ul></ul><ul><ul><li>= historical dividend-payout-ratio * (1+G n )/(K e – G n ) </li></ul></ul>From Intrinsic to Relative Valuation
    204. 204. A company with a required rate of return of 15%, a dividend payout of 40% with a return on equity of 18% in a market with a risk free rate of return of 7%. What is the P/E ratio of the company? Applications (looking out for constant growth rate) <ul><li>Solution </li></ul><ul><li>Stock price = P 0 = Dividend (D 1 )/(k – g) </li></ul><ul><li>P 0 /E = [D 1 /E]/[k-g)] </li></ul><ul><li>Growth = (1 – payout ratio) * ROE </li></ul><ul><li>= (1 – 0.40) * 18% </li></ul><ul><li>= 10.8% </li></ul><ul><ul><li>P/E = [0.40]/[0.15 – 0.108] = 9.5X </li></ul></ul>
    205. 205. <ul><li>A company has a beta of 1.2 (more volatile than the market) with an earnings growth rate of 8% and a dividend payout of 40%. Expected return in the market portfolio is valued at 11% with a treasury bill yield of 5%. What is the current P/E ratio? </li></ul>Applications (looking out for cost of equity - k) <ul><li>Solution </li></ul><ul><li>Stock price = P 0 = Dividend (D 1 )/(k – g) </li></ul><ul><li>P 0 /E = [D 1 /E]/[k-g)] [D 1 /E] = 40% g= 8% </li></ul><ul><li>Using Capital Asset Pricing Model (CAPM) </li></ul><ul><li>K = R f + beta * (R m – r f ) </li></ul><ul><li>= 5% + 1.2*[11% - 5%] = 12.2% </li></ul><ul><ul><li>P/E = [0.40]/[0.122 – 0.08] = 9.52X </li></ul></ul>
    206. 206. <ul><li>A company with an earnings retention rate of 55% and an implied cost of equity of 13%. Next year projected earnings was computed as N2.95 with growth rate at 8%. What is the forward looking P/E ratio? </li></ul>Applications <ul><li>Solution </li></ul><ul><li>Stock price = Dividend (D1)/(k – g) </li></ul><ul><li>Dividend = earnings (1 – retention rate) </li></ul><ul><li>[note; dividend/earnings =payout ratio = 1 – retention rate] </li></ul><ul><ul><li>= 2.95(1 – 0.55) </li></ul></ul><ul><ul><li>= 1.3275 </li></ul></ul><ul><ul><li>Current Price = 1.3275/(0.13 – 0.08) = N26.55 </li></ul></ul><ul><ul><li>P/E = 26.55/2.95 = 9X </li></ul></ul>
    207. 207. <ul><li>In favour of PE Ratio </li></ul><ul><ul><li>The only valuation provided by the NSE Official List Report (SEDOL) </li></ul></ul><ul><ul><li>Makes sense to both professionals/institutional and retail investors alike </li></ul></ul><ul><ul><li>Uses less assumptions compared to discounted cashflow method </li></ul></ul><ul><ul><li>Easiest to compute and explain </li></ul></ul>PE Ratio Advocates
    208. 208. <ul><li>Drawbacks of PE Ratio as an investment decision tool </li></ul><ul><ul><li>It disregards other valuation method – low PER is it! </li></ul></ul><ul><ul><li>Seeking low PER using training earnings can be very deceptive. What about arriving or soon-to-be-published earnings? </li></ul></ul><ul><ul><li>Not comparable across industries. Why? </li></ul></ul><ul><ul><li>What happens when earnings are negative? Use Price to Sales ratio (start-up companies – little or no earnings) </li></ul></ul><ul><ul><li>Uses earnings NOT cashflow </li></ul></ul><ul><ul><li>Inflation dependent. Higher inflation tends to lead to higher PER for equities. </li></ul></ul><ul><ul><li>Price to Cash Flow (P/CF) has an advantage over P/E because unlike earnings, cash flows are NOT influenced by the choice of accounting methods. </li></ul></ul>PE Ratio Advocates
    209. 209. <ul><li>Playing games with earnings </li></ul><ul><ul><li>Deferring expenses that should have been deducted to save taxes </li></ul></ul><ul><ul><li>Valuable acquisitions avoided in order not to amortise goodwill against earnings </li></ul></ul><ul><ul><li>Investors/shareholders are more interested in value than in earnings! Enter EVA (Economic Value Added). </li></ul></ul>PER – Behind the scene!
    210. 210. <ul><li>In Brief </li></ul><ul><ul><li>EVA = Operating Profit – costs of capital employed to generate the earnings </li></ul></ul><ul><ul><li>EVA up if minimal cost is used to generate operating profit (tie down less capital!) </li></ul></ul><ul><ul><li>Use new capital to invest in projects that will not result increase cost of funding to the business (FBN excess cash challenge). </li></ul></ul><ul><ul><li>Divert capital from business activities providing less return (CAP Plc scenario) </li></ul></ul><ul><ul><li>A negative EVA destroys value! </li></ul></ul><ul><ul><li>Management should invest in projects with returns above the cost of capital. </li></ul></ul>EVA – Economic Value Added
    211. 211. <ul><li>Equities Research </li></ul>
    212. 212. It is all about determining the future price of securities today .
    213. 213. <ul><li>In a bullish market, every investors and speculators suddenly become analysts but a professional research analyst remain unwavering in bullish & bearish markets. </li></ul><ul><li>“ show me an ideal investor who can carefully read, analyze, make sense of market data (amidst the daily market noise) and I will show you a professional research analysts” </li></ul>Equities Research - Introduction
    214. 214. <ul><li>This Research Report is based on information available to the public from sources we believe to be reliable, but their accuracy or completeness cannot be guaranteed. </li></ul><ul><li>We disclaim all liability arising from its use. This is not an offer to buy or sell or a solicitation to buy or sell the securities mentioned herein. </li></ul><ul><li>We have expressed all opinions in good faith but are subject to change without notice. </li></ul><ul><li>The Company may effect transactions in securities of companies mentioned herein and may also perform or seek to perform investment management services for those companies mentioned herein. </li></ul>Equities Research - Introduction
    215. 215. <ul><li>Know your audience/readers (this helps to determine your language level) </li></ul><ul><li>Be economical in your use of words and ensure tightly coupled sentences </li></ul><ul><li>Use data in tabular layout rather than attempting to discuss data </li></ul><ul><li>For professional research reports, keep the number of pages to the required minimum, your readers time is important </li></ul>What you should know
    216. 216. <ul><li>Company financial accounts </li></ul><ul><li>Investors relations department/desk </li></ul><ul><li>Regulators and Exchanges </li></ul><ul><li>Public sources – newspapers, libraries etc </li></ul><ul><li>Analysts (Brokers) Research Reports </li></ul><ul><li>Trade associations </li></ul><ul><li>Other stakeholders – suppliers, customers/clients </li></ul><ul><li>Competitors </li></ul><ul><li>Rating agencies </li></ul>Data & Information Sources
    217. 217. <ul><li>Top-down: </li></ul><ul><li>The top means the real top and analysing the health of the global economy </li></ul><ul><ul><li>What are the major influences that are the most important in the current global economic environment ? </li></ul></ul><ul><li>Analysis of specific regional influences that have a more specific influence on a national economy and its prospects </li></ul><ul><ul><li>What are the major influences within the African and West African trade economic blocs? </li></ul></ul>Top-down & Bottom-up Approaches
    218. 218. <ul><li>Top-down: </li></ul><ul><li>The natural extension of macro-economic analysis to perform is the review of the national economy </li></ul><ul><ul><li>Fiscal Policy </li></ul></ul><ul><ul><li>Monetary Policy </li></ul></ul><ul><ul><li>Strength of Local Institutions (Legal and others) </li></ul></ul><ul><ul><li>GDP growth rates </li></ul></ul><ul><ul><li>Economic Dependency on a particular industry or industries </li></ul></ul><ul><ul><li>Inflation levels and trends </li></ul></ul><ul><ul><li>Employment </li></ul></ul><ul><ul><li>Levels of Manufacturing Output </li></ul></ul>Top-down & Bottom-up Approaches
    219. 219. <ul><li>Top-down: </li></ul><ul><li>Putting together the various elements of this macro-economic analysis is important to assess the longevity of current economic trends </li></ul><ul><ul><li>Inter-relationship between the state of the global or regional economy and the national economy </li></ul></ul><ul><ul><ul><li>Are export markets weakening ? </li></ul></ul></ul><ul><ul><ul><li>Are international capital markets drying up as sources of externally available credit </li></ul></ul></ul><ul><ul><ul><li>Are there fresh competitors in the markets ? </li></ul></ul></ul>Top-down & Bottom-up Approaches
    220. 220. <ul><li>Top-down: </li></ul><ul><li>Final step in the macro-analysis is to analyse the major index </li></ul><ul><li>Determine the internal health of the index by utilising techniques of fundamental or technical analysis </li></ul><ul><li>Fundamental analysis tools such as assessing price-to-earnings/growth ratio, return on equity or dividend yields are important historical comparatives </li></ul><ul><li>This will help to assess whether markets are over or undervalued relative to historical standards </li></ul>Top-down & Bottom-up Approaches
    221. 221. <ul><li>Top-down: </li></ul><ul><li>In addition to fundamental analysis , technical analysis may be applied to assess the long and short term state of the market </li></ul><ul><li>Tools such moving averages, relative strength indexes momentum and Elliott Wave may be used depending on the skills and preferences of the practitioner </li></ul><ul><li>Technical analysis will often be used in conjunction with fundamental analysis, concentrating on weekly and/or daily charts to time entry into the market </li></ul>Top-down & Bottom-up Approaches
    222. 222. <ul><li>Positive features of Top-down analysis: </li></ul><ul><li>Argument often advanced is that top-down analysis allows portfolio managers to make appropriate asset allocation decisions in all market conditions </li></ul><ul><li>Important consideration in deciding whether to invest in equities or other asset classes such as bonds or commodities </li></ul><ul><li>Argument may be extended one step further to decide upon allocation of capital between different market sectors within the broad equity market </li></ul><ul><li>May also extend to the selection of foreign markets </li></ul>Top-down & Bottom-up Approaches
    223. 223. <ul><li>Positive features of Top-down analysis: </li></ul><ul><li>Top-down analysis is usually the preserve of market strategists </li></ul><ul><li>Market strategists are often quicker to downgrade earnings if macro-economic conditions warrant it </li></ul><ul><ul><li>Why would this be a feature of numerous academic studies ? </li></ul></ul><ul><li>Market strategists also tend to be less optimistic than stock analysts </li></ul><ul><ul><li>Why would this factor emerge ? </li></ul></ul>Top-down & Bottom-up Approaches
    224. 224. <ul><li>Negative Features features of Top-down analysis: </li></ul><ul

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