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Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
Stock market presentation
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Stock market presentation

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Students from ESEI had the opportunity to learn how the Stock Market works. As a complementary activity, ESEI organized an Industrial Visit to the Stock Exchange in Barcelona.

Students from ESEI had the opportunity to learn how the Stock Market works. As a complementary activity, ESEI organized an Industrial Visit to the Stock Exchange in Barcelona.

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  • 1. STOCK  MARKETS 2007 FINANCIAL MESS: REASONS • US. And European housing market bubble: ‐ Interest rates too low L k f b ki l i i h• Lack of banking regulations in the: ‐ Hedge funds and Investment banks; ‐ Derivative markets (Credit‐default‐swaps) and;Derivative markets (Credit default swaps) and; Asset‐back securities. • Home‐ownership obsession: ‐ Crazy lending (subprime); ‐ Tax subsidizing. i i l i fl f hi• Massive Capital inflows from China • Rational markets –speculation‐ • US fiscal policy tax cutting and enormously war spendingUS fiscal policy, tax cutting and enormously war spending • Credit Agencies: • ‐ High rating to untested new securities such as the Collateral Debt Obligations (CDOs). • Lehman Brothers bankruptcy
  • 2. STOCK  MARKETS
  • 3. KEY  STOCK MARKET INDEX: STOCK  MARKETS 01/02/2011 30/09/2011 % change DOW                          11.891          11.154             ( 6.20) NASDAQ                      2.276            2.139             ( 6.02) S & P 500                     1.286            1.131            (12.05) DAX 7 077 5 502 (22 25)DAX                               7.077             5.502           (22.25) STOXX50E                    2.954             2.180           (26.20)
  • 4. KEY EU BANKS STOCK´s PERFORMANCE SINCE 01/02/2011 STOCK  MARKETS KEY EU BANKS STOCK s PERFORMANCE SINCE 01/02/2011 • DEXIA                                                    (59.08 %) • SOCIÉTÉ GÉNÉRALE                            (55.15 %) • UNICREDIT                                           (52.03 %) • CRÉDIT AGRÍCOLE                              (50.53 %) BNP (43 91 %)• BNP                                                       (43.91 %) • INTESA                                                  (41.86 %) • DEUTSCHE BANK (36.99 %)DEUTSCHE BANK                                (36.99 %) • ING                                                        (32.47 %) • SANTANDER                                        (25.40 %) • BBVA                                                     (22.00 %)       
  • 5. KEY USA BANKS STOCK´s PERFORMANCE SINCE 01/02/2011 STOCK  MARKETS KEY USA BANKS STOCK s PERFORMANCE SINCE 01/02/2011 • BANK of AMERICA                                      (56.75 %) • J.P MORGAN CHASE                                   (31.37 %) • CITIGROUP  (after the June split 1:10)   (32.78 %) WELLS FARGO (24 42 %)• WELLS  FARGO                                             (24.42 %) • B. of NY MELLON                                         (58.53 %)
  • 6. WHY EUROPEAN STOCK MARKETS FALL? STOCK  MARKETS WHY EUROPEAN STOCK MARKETS FALL? • Sovereign debt, bond yield spreads and CDS: Fears of a sovereign debt crisis of some European states members, Greece,Fears of a sovereign debt crisis of some European states members, Greece, Portugal, Ireland, and Spain (called PIGS). In the EU, in countries where sovereign debts have increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and riskconfidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps (CDS) between these countries and Germany. • Toxic Assets: Held in EU banking Assets such as: Greek debt mortgages and loans toHeld in EU banking Assets such as: Greek debt, mortgages and loans to subprime borrowers, and foreclose mortgage‘s properties valued much higher than the market value. • European countries and USA double deep recession fears: Europe GDP growth forecast for 2011 at 1 5 %; USA: 2 5 %Europe GDP growth forecast for 2011 at 1.5 %; USA: 2,5 %
  • 7. • Greece: STOCK  MARKETS ‐Deficit from 10.5 % of GDP in 2010 to  8.5 % in 2011 ‐Will miss target deficit in 2011and 2012 ‐Public debt: 142.8 % of GDP. • Banking stocks are the biggest fallers in EU, on concerns about their exposure to Greek government debt Greeceabout their exposure to Greek government debt . Greece needs the 8bn Euro' installment to avoid going bankrupt this month, October 2011. • Bankruptcy would put severe pressure on the eurozone, damage EU bank finances and possibly have a serious knock‐damage EU bank finances and possibly have a serious knock on effect on the world economy.
  • 8. • Portugal might be the next: Spain: STOCK  MARKETS Portugal  might be the next:                   Spain:  ‐Deficit: 9.1 % of GDP                                   ‐Deficit: 9.2% of GDP ‐Public debt: 93 % of GDP                            ‐Public debt: 60.1 % of GDP  • Germany: Italy:• Germany:                                             Italy: ‐Deficit: 5 % of GDP                                       ‐Deficit: 6  % of GDP                           ‐Public debt:  83.2 % of GDP                        ‐Public debt:  120 % of GDP F UK• France:                                                  UK: ‐Deficit: 8.5 % of GDP                                    ‐Deficit 6 % of GDP ‐Public debt:  81.7 % of GDP                        ‐Public debt: 80 % of GDP • USA: ‐Federal Deficit: 10 % of GDP ‐Federal debt:  92 % of GDP Note: All deficit and public debt are related to 2010 EU TARGETS for 2011: Debt not higher than 60 % of GDP,EU TARGETS for 2011: Debt not higher than 60 % of GDP, Deficit not higher than 3% of GDP, and Inflation not higher than 1.5 % above German inflation
  • 9. • Stock market or equity market: is a concept of the mechanism that STOCK  MARKETS q y p enables the trading of company stocks, the world‐wide size: ~$ 52 trillions, and other securities such as bonds and derivatives, these are securities listed and traded in the stock exchange.are securities listed and traded in the stock exchange. • Bonds are traded in the OTC (over‐the‐counter) bonds market, the size is ~ $ 46 trillions. Commodities are traded in the commodities markets. • Derivative instrument: A security or contract whose value is derived• Derivative instrument: A security or contract whose value is derived or dependent from the value of some other underlying asset. The main classes of derivatives are: forwards, futures, options, and swaps. Th d i ti t t i diti itiThere are derivative contracts on currencies, commodities, equities, interest rates and others. Futures are traded on specific exchange markets such as: Chicago Board of Trade (CBT), EUREX, LIFFE, MATIF, and others.
  • 10. • Trading: Participants in the stock market can range from individual STOCK  MARKETS g p g stock investors to large hedge fund traders. Some exchanges are physical locations where transaction are carried out on a trading floor by a method known as an open outcry (stocks and commodity exchanges)a method known as an open outcry (stocks and commodity exchanges) the other method is via computer terminals. Actual trades are based on an auction market, where potential buyer bids a specific price for a stock and potential seller asks a specific price for the stock Buying orstock and potential seller asks a specific price for the stock. Buying or selling at market means you will accept any ask price or bid for the stock respectively. • Function : Stock market is one of the most important sources for companies to raise money, this allows business to go public andcompanies to raise money, this allows business to go public and raise additional capital for expansion. • The Liquidity that  an exchange  market provides affords  investors  the  ability  to quickly and easily sell a securities  as  compared to  less liquid  investment as real state.
  • 11. Capital markets: STOCK  MARKETS Capital markets: • Are the corporate stock markets including: common stocks, preferred stocks, convertibles securities, warrants etc. and long‐term‐debt markets such as the Bond markets. Primary markets:Primary markets: • Are the markets in which corporations raise new capital. The IPO markets: • The initial public offering market is a subset of the Primary market. Here firms “ bli ” b ff i h t th bli f th fi t ti“go public” by offering shares to the public for the first time.
  • 12. DEFINITIONS and KEY RATIOS STOCK  MARKETS Market price :                                 EPS x PER EPS (Earnings per share):    Net Income –Preferred Stock  dividends Number of shares outstanding PER (a multiple):                      Share Price / EPS   Market CAP:                    Market Price x nº Shares outstanding   Price / Book:                                 Stock Price   Book Value  per share Book Value:              Total Assets – Intangible Assets – Liabilities
  • 13. STOCK MARKET E t i V l M k t CAP P f d St k D bt C h• Enterprise Value:            Market CAP +Preferred Stock + Debt – Cash  or Cash equivalent (Marketable securities) • Enterprise Value / Revenues:         Enterprise Value Total Revenues • Enterprise Value / EBITDA:              Enterprise Value EBITDA EBITDA:     Earnings before Interest, Taxes, Depreciation and Amortization • Profit Margin (ROS): Net Income• Profit Margin (ROS):                            Net Income Total Sales  • Operating Margin:                                    EBIT   . T t l S lTotal  Sales  • ROE:                                                         Net Income Total Equity EBIT:        Earnings before  Interest and taxes
  • 14. Securities: Stocks and debt securities (bonds debentures) STOCK  MARKETS Securities:      Stocks and  debt securities (bonds, debentures) Indexes:          NYSE,  Nasdaq,  STOXX50E, DAX,  FTSE, IBEX, Nikkei.. ll k k i d iBull market:   Average stock indexes are going up Bear market:   The opposite of bull market Rally:                 Temporary appreciation in value of stocks or  bonds Correction:      Temporary depreciation in value of stocks or bonds   Sell off:             Temporary correction of stocks  or  bonds Fly to quality: Sell stocks and purchase Government bondsFly to quality:  Sell stocks and purchase Government bonds Overpriced:      Current market prices are above acceptable P/E ratio. U d i d Th i f i dUnderpriced:   The opposite of overpriced Sell short:          Selling a stock without owing the stock (borrowed).  Not allowed in some European countries.Not allowed in some European countries.
  • 15. STOCK  MARKETS TO WATCH • S&P Futures:        Indication on how the market will open (webs: CNN‐Money, p ( y, Bloomberg) • GDP, CPI, PPI:       Gross Domestic Product, Consumer Price Index and Production  Price IndexPrice Index  • Commodities:       Follow the price of  crude oil and copper IF the crude oil is going up the US $ will weaken against the €g g p g • Reports:                 Consumer confidence and unemployment reports • Recession: Two or more consecutives quarters of negative GDP• Recession:             Two or more consecutives quarters of negative GDP • Stagnation:            No growth in terms of GDP and low inflation • Higher inflation:   Interest rates will be moving up  • Interest rates up:  Stocks prices  down and  Yield bonds up, then the bond prices will go downwill go down • Lower inflation:    The opposite of above
  • 16. TECHNICAL ANALYSIS STOCK  MARKETS CORRELATION: • Is the relationship between two variables, the stock and the associatedp Index, for example IBM versus NYSE Index. • Stocks with a reduce correlation helps to minimize the RISK in theStocks with a reduce correlation helps to minimize the RISK in the portfolio. Stocks highly correlated to the Index will perform similarly to the Index. Correlation moves between ‐1 and 1. • When correlation figures are close to ‐1, it means the the stock and the Index moves in opposite way (negative correlation). • Correlation close to 1, it means that the stock and the Index move in the same direction. Close to zero both the stocks and Index move in different direction. VOLATILITY: It is calculated by comparing the standard deviation of the stock´s monthly retur to its appropriated Index.
  • 17. STOCK  MARKETS HOW COMMON STOCKS ARE VALUED Cash payoff to owners of Common stocks comes in two fforms: • Cash dividends   and Capital gains or losses    Rate of Return:Rate of Return: The return that investors expect from this stock over next year is defined as the expected Dividend per share DIV1 plus the expected price appreciation of the stock (P1–P0) divided by the purchase price P0. 1) M k t C it li ti t DIV1+ ( P1 P0)1) Market Capitalization rate:   r =    DIV1+ ( P1 – P0) Po 2) r = DIV1 + g (Dividend growth)2)                                                      r      DIV1  g (Dividend growth) P0
  • 18. STOCK  MARKETS PRICE OF THE STOCK: If investors have the forecast on Dividends and the Market Capitalization rate the Price of thethe Market Capitalization rate, the Price of the stock P0 would be:  1)     Price P0 =   DIV1 + P1 2) Price P0 =   DIV1) ) 1 + r                                      r – g 3)     Price P0 =  EPS1 / (r +PVGO)  ‐General formula‐ k i li ir: Market capitalization Rate g: Dividend growth PV GO : PV of growth opportunities = NPV1 / r ‐ gPV GO : PV of growth opportunities = NPV1 / r  g
  • 19. STOCK  MARKETS Lessons of Market Efficiency • Market have no memoryMarket have no memory • Trust market prices • There are no financial illusions such as: stock splits and dividends, and accounting changesaccounting changes. • Corporate finance alternatives, such  as: issue debt or common stock. • Fair return for its risk, in which the demand for one company’s stock h ld b l ti if ti i k i i l l ti tshould be very elastic, if a prospective risk premium is lower relative to its risk than other stocks, nobody will want to hold that stock.. If it is higher, everybody will want to hold it.
  • 20. EFFICIENT CAPITAL MARKETS STOCK  MARKETS EFFICIENT  CAPITAL MARKETS • If Capital Markets are efficient, then purchase or sale of any security at the ili k t i i NPV t ti i ll l t dprevailing market price is a zero‐NPV transaction, since all relevant and ascertainable information is already reflected in security prices. NPV =    ‐ P0 (stock price)  +  DIV1 + (P1 ‐ P0) =  zero 11 + r   
  • 21. RETURNS and RISK PREMIUMS:  STOCK  MARKETS ( Risk) Average annual      Risk           Standardg Rate of Return Premium Deviation (σ) 1. Common stocks (S&P 50) 11.3 8.8 22.4 %1. Common stocks (S&P 50)      11.3               8.8                 22.4  % 2. Corporate bonds                        4.2               1.7                   5.6 3. Government bonds                   3.5                1.0                  5.7 4 Treasury bills (T bs) 2 5 0 2 14. Treasury bills (T‐bs)                   2.5                0                      2.1 ‐Average Returns since 1929 University of Chicago.
  • 22. Example:       Probability Distribution in business STOCK  MARKETS Economic Mean Outcome Probab.x Invest.(1) ER% ERR(2) (1‐2)   Squared x Probab.=Variance strong 0 3 40 % 12 10 30 900 0 3 270strong           0.3           40 %        12        10       30        900             0,3          270 normal          0.4           25            10        10       15        225             0,4            90 week             0.3  ‐40           ‐12 10      ‐50       2500            0,3          750 1 0 10% 1 1101.0 10%                                                              1.110 ER                                            =   Average Expected Return                ERR = Expected Rate of Return (mean)ERR                                               Expected Rate of Return (mean) VARIANCE  =   1.110 STANDARD DEVIATION (σ ) =      √  1.100      =  33.32 %( ) CV: (Coefficient of  Variation) =3,33  (Standard Deviation / ERR)
  • 23. STOCK MARKET ALTERNATIVES: STOCK  MARKETS • Investing in Stock, bonds or Treasury Bills (T‐bs) • Investing in Investment/Mutual funds • Investing in Stock OptionsInvesting in Stock Options • Investing in Futures to HEDGE Long position in Stocks
  • 24. Investing in Stocks: Highest Return, Risk and Risk Premium STOCK  MARKETS Analyze: • Market Prices and its Index, if you invest in top European companies iny p p p €, the Index would be the EUROXX50E. Beta 1 means same return as the index. • 52‐week high and 52 week low (buy low and sell high) and key returns and statistics (web: Yahoo finance USA or local). • Look into the Futures market in USA for the expected opening S&P, NASDAQ and NYSE (webs: CNN‐Money, Bloomberg, and Barchart). • If the USA’s stocks trend is up European stock will follow or vise‐versa NYSE, NASDAQ, S&P 52‐week high and low. (if markets are at 52‐week high, these may have a correction). To make money invest in November and sell in April (statistics). However, In a recession scenarios do not invest in stocks.,
  • 25. Investing in Bonds/ T‐bills Lowest Return, Risk and Risk Premium STOCK  MARKETS Analyze: • The trend in interest rates since higher Yields means lower Prices• The trend in interest rates, since higher Yields means lower Prices • For bonds , the Coupon is fixed up to Redemption date ( if the bond is ll bl ) i hi h i b d id i knot callable). Invest in a higher rating bonds to avoid risk. AAA or AA rating. In a recession  scenarios invest in Bonds / T‐bills or cash.
  • 26. Investing in Investment/Mutual Funds  STOCK  MARKETS Medium Return, Risk and Risk Premium Analyze : • Lower risk than investing in individual stocks • Diversification and liquidity • Select the top market funds.
  • 27. INVESTMENT FUNDS / MUTUAL FUNDS STOCK  MARKETS • Is a type of a company that brings together a group of investors and invests their money in stocks, bonds, and other securities. Each investor owns shares (Mutual) or participations (Investment funds) which represent aowns shares (Mutual) or participations (Investment funds), which represent a portion of the holdings of the fund. • Investors purchase funds because they don’t have the time or the expertiseInvestors purchase funds because they don t have the time or the expertise to manage their own portfolios. It is relatively inexpensive for a small investor. Th i i i d h l l f RISK h h i i illi k• The investments is suited to the level of RISK that the investor is willing to take. • Diversification RISK is spread outRISK is spread‐out. • Economies of scale: Its transaction costs are lower that what any individual would pay forIts transaction costs are lower that what any individual would pay for securities transactions. • Liquidityq y If you decide to sale the holdings, the cash value will be credited into your account in 48+ hours.
  • 28. I ti i St k O ti STOCK  MARKETS Investing in Stock Options: • Option Definition: A contract that grants the Holder the right (not the bli ti ) t BUY (C ll O ti ) SALE (P t O ti ) STOCK t ifi iobligation) to BUY (Call Option) or SALE (Put Option) a STOCK at specific price (striking price) for specific period of time, for a PREMIUM payable up front. B B k S llBuyer                                                   Banks    Seller  HOLDERS OTC market                               WRITERS (over‐the‐counter) Buyer of a CALL (Long Call)                             Seller of a CALL (Short Call) Risk Cost   Expectation Risk  Income Expectation Non     Premium       up                                          Limited       Premium    down (if owns the stock) Unlimited (if naked or uncovered)( ) Buyer of a PUT (Long Put)                                 Seller of a PUT (Short Put) Risk Cost Expectation Risk Income ExpectationRisk Cost  Expectation Risk  Income Expectation Non    Premium      down                                      Unlimited  Premium     up
  • 29. STOCK  MARKETS Who can EXERCISE an OPTION ? • ONLY the HOLDER who pays a PREMIUM up front to the WRITER• ONLY the HOLDER, who pays a PREMIUM up front to the WRITER, through a bank‐OTC‐market, the Premium cost is the maximum loss for the Holder. • IF a CALL Option is exercised by the Holder, the Writer has to sell the stock at striking price. • IF a PUT Option is exercised by the Holder, the Writer has to buy the stock at striking price. • A CALL Option will be exercised if the striking price < Market price • A PUT Option will be exercised if the striking price > Market price• A PUT Option will be exercised if the striking price > Market price • If a CALL or PUT Option is not exercised the Option is worthless
  • 30. For a Call Option: STOCK  MARKETS For a Call Option: IF  striking price is  <  than market price  =  In‐the‐money ** IF  striking price is  =  than market price  =  At‐the‐money IF iki i i h k i O f hIF  striking price is  >  than market price  =  Out‐of‐the‐money ** the Call Option will be exercised at  “In‐the‐money”
  • 31. For a PUT Options: STOCK  MARKETS IF striking price is > than the  market price  = In‐the‐money ** IF striking price is = than the market price   = At‐the‐money IF striking price is < than the market price = Out‐of‐the‐moneyIF striking price is < than the market price     Out of the money  ** the PUT Option will be exercised  at “ In‐the‐money “
  • 32. Invest in the Futures market STOCK  MARKETS • Futures markets are used by institutional investors, pension funds, investment/mutual funds and investors to HEDGE their Long portfolio iti i t k itiposition in stocks or securities. • If a portfolio manager fears that a bear market is imminent and wishes t HEDGE hi tf li i t th t ibilit t t ld bto HEDGE his portfolio against that possibility, one strategy would be to liquidate the portfolio and place the proceeds into short‐term debt instruments, however, the transaction cost would be quite high. Such plan is infeasible.plan is infeasible. • The European manager, however, could use the STOXX50E Index futures contract in the EUREX market. By SELLING future contracts (Shortcontract in the EUREX market. By SELLING future contracts (Short Hedge) the manager could be able to offset the effect of the bear market on the portfolio by generating gains in the future markets.
  • 33. • Futures markets are not OTC (over‐the‐counter) markets, the Futures k t t li d i ifi h t d d k t h STOCK  MARKETS markets are centralized in specific exchange traded markets such as: EUREX (Zurich, Frankfurt), CBT (Chicago Board of Trade), LIFFE London International Financial Futures), LCE (London Commodity Exchange) , NYFE (NY Futures Exchange), IPE‐ICE (International Petroleum Exchange) . . .( g ) • The Margins required and daily mark‐to‐market settlements are key requirements in the Futures markets. • HEDGER: Is the trader that enters the Futures markets in order to reduce a pre‐existing risk. • ESPECULATOR: Is a trader who enters the Futures markets in search of a profit and, by so doing, willingly accepts increased risk.

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