Share Market

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Share Market

  1. 1. Chapter 4 <ul><li>The Share Market </li></ul><ul><li>and the Corporation </li></ul><ul><li>Websites: </li></ul><ul><li>www.asic.gov.au </li></ul><ul><li>www.asx.com.au </li></ul><ul><li>www.nyse.com </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  2. 2. Learning Objectives <ul><li>Understand the nature of corporations and reasons for public listing </li></ul><ul><li>Discuss the role of primary and secondary markets in equity financing </li></ul><ul><li>Explain the derivatives and interest rate roles of a stock exchange </li></ul><ul><li>Understand the electronic trading and settlement systems for share market transactions </li></ul><ul><li>Explain the importance of information flows for share market efficiency </li></ul><ul><li>Identify the main regulators of the share market </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  3. 3. Chapter Organisation <ul><li>4.1 The Nature of a Corporation </li></ul><ul><li>4.2 The Stock Exchange </li></ul><ul><li>4.3 Summary </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  4. 4. 4.1 The Nature of a Corporation <ul><li>Share market </li></ul><ul><ul><li>A formal exchange facilitating the issue, buying and selling of equity securities </li></ul></ul><ul><li>Publicly listed corporation </li></ul><ul><ul><li>A company whose shares are quoted and traded on a formal stock exchange (SX) </li></ul></ul><ul><li>Ordinary share </li></ul><ul><ul><li>The principal form of equity issued by a corporation, which bestows a claim to residual cash flows and ownership and voting rights </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  5. 5. 4.1 The Nature of a Corporation (cont.) <ul><li>The corporation differs from other business forms </li></ul><ul><ul><li>Ownership claims are widespread and easily transferable </li></ul></ul><ul><ul><li>Owners (shareholders) do not affect the day-to-day affairs of the company </li></ul></ul><ul><ul><li>Shareholders’ liability is limited to </li></ul></ul><ul><ul><ul><li>T he issue price of shares of a limited liability company </li></ul></ul></ul><ul><ul><ul><li>Any partly paid portion of shares of a no-liability company </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  6. 6. 4.1 The Nature of a Corporation (cont.) <ul><li>Advantages of the corporate form </li></ul><ul><ul><li>Can obtain large amounts of finance for a relatively cheap cost </li></ul></ul><ul><ul><li>The liquidity of securities facilitates investor diversification and encourages investment in corporate securities </li></ul></ul><ul><ul><li>Separation of ownership and control facilitates </li></ul></ul><ul><ul><ul><li>Appointment of s pecialised management </li></ul></ul></ul><ul><ul><ul><li>Greater effectiveness in the planning and implementation of strategic decisions </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  7. 7. 4.1 The Nature of a Corporation (cont.) <ul><li>Advantages of the corporate form (cont.) </li></ul><ul><ul><li>‘ Perpetual succession’—the corporate form is unaffected by changes in management or ownership </li></ul></ul><ul><ul><li>The corporate form is suited to large-scale operations </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  8. 8. 4.1 The Nature of a Corporation (cont.) <ul><li>Disadvantages of the corporate form </li></ul><ul><ul><li>Main disadvantage arises due to the separation of ownership and control </li></ul></ul><ul><ul><ul><li>Conflict of interest between owners (principals) and managers (agents) known as the agency problem </li></ul></ul></ul><ul><ul><ul><li>Management may try to run business for their own benefit, rather than that of shareholders, i.e. maximise shareholder value (share price) </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  9. 9. 4.1 The Nature of a Corporation (cont.) <ul><li>Disadvantages of the corporate form (cont.) </li></ul><ul><ul><li>Factors moderating conflict of interest between owners and managers </li></ul></ul><ul><ul><ul><li>Investors’ ability to sell shares in a corporation, causing the share price to fall </li></ul></ul></ul><ul><ul><ul><li>Dismissal from the board at AGM by shareholders </li></ul></ul></ul><ul><ul><ul><li>Threat of takeover and loss of employment </li></ul></ul></ul><ul><ul><ul><li>Use of performance incentives, such as share options </li></ul></ul></ul><ul><ul><ul><li>More rigorous corporate governance </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  10. 10. Chapter Organisation <ul><li>4.1 The Nature of a Corporation </li></ul><ul><li>4.2 The Stock Exchange </li></ul><ul><li>4.3 Summary </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  11. 11. 4.2 The Stock Exchange (SX) <ul><li>Primary market role </li></ul><ul><li>Secondary market role </li></ul><ul><li>Derivative market role </li></ul><ul><li>Interest rate market role </li></ul><ul><li>Trading and settlement roles </li></ul><ul><li>Information role </li></ul><ul><li>Regulatory role </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  12. 12. Primary market role <ul><li>The SX f acilitates the efficient and orderly sale of new financial securities </li></ul><ul><ul><li>New floats/initial public offerings (IPOs) </li></ul></ul><ul><ul><ul><li>Initial listing of a corporation on the SX </li></ul></ul></ul><ul><ul><li>Rights issue </li></ul></ul><ul><ul><ul><li>Issue of additional shares to existing shareholders on a pro-rata basis </li></ul></ul></ul><ul><ul><li>Placements </li></ul></ul><ul><ul><ul><li>Issue of new shares to selected institutional investors </li></ul></ul></ul><ul><ul><li>Dividend reinvestment plans </li></ul></ul><ul><ul><ul><li>Reinvestment of dividends into corporation for additional shares </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  13. 13. Primary market role (cont.) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  14. 14. Primary market role (cont.) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  15. 15. Secondary market role <ul><li>The SX f acilitates trading in existing shares </li></ul><ul><ul><li>No new funds are raised by the issuing company </li></ul></ul><ul><ul><li>An active, liquid, well-organised secondary market increases the appeal of buying new shares in the primary market </li></ul></ul><ul><ul><li>Market liquidity </li></ul></ul><ul><ul><ul><li>Ratio of share turnover to market capitalisation </li></ul></ul></ul><ul><ul><li>Market turnover </li></ul></ul><ul><ul><ul><li>Number of shares on issue x current share price </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  16. 16. Secondary market role (cont.) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  17. 17. Derivative market role <ul><li>The SX provide s a m arket for trading equity -related derivative products </li></ul><ul><ul><li>A derivative is a financial security that derives its price from an underlying commodity (e.g. gold) or financial instrument (e.g. Fosters shares) </li></ul></ul><ul><ul><li>Derivative products are described as </li></ul></ul><ul><ul><ul><li>Exchange-traded contracts </li></ul></ul></ul><ul><ul><ul><ul><li>Standardised financial contracts traded on a formal exchange </li></ul></ul></ul></ul><ul><ul><ul><li>Over-the-counter contracts </li></ul></ul></ul><ul><ul><ul><ul><li>Non-standardised contracts negotiated between writer and buyer </li></ul></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  18. 18. Derivative market role (cont.) <ul><li>The SX provide s a m arket for trading equity -related derivative products (cont.) </li></ul><ul><ul><li>Derivatives serve as a </li></ul></ul><ul><ul><ul><li>R isk management tool (hedge) </li></ul></ul></ul><ul><ul><ul><li>S peculative instrument </li></ul></ul></ul><ul><ul><li>Derivatives traded on a SX include </li></ul></ul><ul><ul><ul><li>Options </li></ul></ul></ul><ul><ul><ul><li>Warrants </li></ul></ul></ul><ul><ul><ul><li>Futures contracts </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  19. 19. Interest rate market role <ul><li>The listing, quotation and trading of typically longer-term debt instruments on a SX </li></ul><ul><ul><li>Straight corporate bonds </li></ul></ul><ul><ul><li>Floating rate notes (FRNs) </li></ul></ul><ul><ul><li>Convertible notes </li></ul></ul><ul><ul><li>Preference shares </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  20. 20. Interest rate market role (cont.) <ul><li>This role adds value to a debt issue due to </li></ul><ul><ul><li>Transparency </li></ul></ul><ul><ul><ul><li>Information about price, yield, maturity, credit rating of debt instruments </li></ul></ul></ul><ul><ul><li>Ease of entry </li></ul></ul><ul><ul><ul><li>Electronic trading system facilitates buy and sell orders at minimum cost and time delay at current market prices </li></ul></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><ul><li>Quotation on a SX provides access to a wider market </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  21. 21. Trading and settlement roles <ul><li>The ASX uses CLICK XT, an integrated computer-based trading system to trade all listed securities </li></ul><ul><ul><li>Clients’ orders are executed via computer from the broker’s office </li></ul></ul><ul><ul><li>Orders are executed in order of time recei ved and the buy/sell price </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  22. 22. Trading and settlement roles (cont.) <ul><li>The ASX uses CHESS (Clearing House Electronic Sub - register System) </li></ul><ul><ul><li>Facilitates the settlement of transactions conducted through CLICK XT </li></ul></ul><ul><ul><li>S ettlement of t ransactions within 3 days (T + 3) </li></ul></ul><ul><ul><li>Provides an electronic sub-register that records the ownership of listed securities </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  23. 23. Trading and settlement roles (cont.) <ul><li>CDI ( CHESS Depositary Interest) </li></ul><ul><ul><li>Electronic depositary receipts issued by the ASX representing uncertificated (scriptless) securities </li></ul></ul><ul><ul><ul><li>CUFS (CHESS Unit Foreign Securities) for equity securities </li></ul></ul></ul><ul><ul><ul><li>DI (Depositary Interest) for debt and bearer securities </li></ul></ul></ul><ul><ul><li>Overcomes problems of countries not recognising uncertificated holdings or the electronic transfer of legal title </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  24. 24. Information role <ul><li>Investor confidence in the Australian Stock Exchange (ASX) relies on informational efficiency </li></ul><ul><ul><li>The current share prices should reflect all information available in the market </li></ul></ul><ul><li>The ASX has a critical role in facilitating the flow of information to the market </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  25. 25. Information role (cont.) <ul><li>Listing rules are SX rules with which a listed entity must comply </li></ul><ul><li>Examples of information disclosures required by ASX listing rules </li></ul><ul><ul><li>A change in a company’s financial forecasts </li></ul></ul><ul><ul><li>Appointment of a liquidator </li></ul></ul><ul><ul><li>Declaration of a dividend </li></ul></ul><ul><ul><li>Notice of a takeover bid </li></ul></ul><ul><ul><li>Disclosure of directors’ interests </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  26. 26. Regulatory role <ul><li>The aim of r egulation is to ensure market participants have confidence in the integrity of market operations </li></ul><ul><li>Two main supervisors in Australia </li></ul><ul><ul><li>Australian Stock Exchange ( ASX ) </li></ul></ul><ul><ul><li>Australian Securities and Investment Commission ( ASIC ) </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  27. 27. Regulatory role (cont.) <ul><li>ASX </li></ul><ul><ul><li>Ensures listed companies meet specified limited levels of performance and standards of information disclosure so investors can make informed decisions </li></ul></ul><ul><ul><ul><li>Continuous disclosure </li></ul></ul></ul><ul><ul><li>Prescribes appropriate behaviour of broker participants on the exchange </li></ul></ul><ul><ul><ul><li>Sanctions include discipline, penalties, loss of licence </li></ul></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  28. 28. Regulatory role (cont.) <ul><li>ASX (cont.) </li></ul><ul><ul><li>Electronic surveillance systems to monitor trading behaviour of market participants </li></ul></ul><ul><ul><ul><li>Detect trades that fall outside certain limits </li></ul></ul></ul><ul><ul><ul><li>C ross-references all trades against information on the relevant company, directors and associated parties </li></ul></ul></ul><ul><ul><li>The National Guarantee Fund (NFG) compensates investors in the event of failure or misconduct by a stockbroker </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  29. 29. Regulatory role (cont.) <ul><li>ASIC </li></ul><ul><ul><li>Responsible for the supervision of Corporations Law and markets in Australia ( Corporations Act 2001 (Cwlth)) </li></ul></ul><ul><ul><li>Responsible for market integrity and consumer protection across the financial system , covering investment, insurance and superannuation products </li></ul></ul><ul><ul><li>Supervises the ASX, addressing the potential conflict of interests as a publicly listed corporation </li></ul></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  30. 30. Chapter Organisation <ul><li>4.1 The Nature of a Corporation </li></ul><ul><li>4.2 The Stock Exchange </li></ul><ul><li>4.3 Summary </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-
  31. 31. 4.3 Summary <ul><li>Corporate form of organisation has advantages (fundraising and management) and disadvantage of separation of ownership and control </li></ul><ul><li>The SX has a number of market roles </li></ul><ul><ul><li>Primary and secondary </li></ul></ul><ul><ul><li>Derivative </li></ul></ul><ul><ul><li>Interest rate </li></ul></ul><ul><ul><li>Trading and settlement </li></ul></ul><ul><ul><li>Information </li></ul></ul><ul><ul><li>Regulatory </li></ul></ul><ul><li>ASX monitors market participants and ASIC supervises Corporations Law and market integrity </li></ul>Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 4-

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