Download Globalization of Stock Markets

PowerPoint Slides for:
Financial Markets
and Institutions
6th Edition
By Jeff Madura
Prepared by
David R. Durst
The University of Akron
CHAPTER
10
Stock Offerings
and Investor
Monitoring
Chapter Objectives
Describe the stock exchanges where stocks are
traded
 Analyze the process of the initial public
offering of stock by a company
 Be able to interpret a stock quote
 Explain the institutional use of stock markets
 Describe the globalization of stock markets

Copyright© 2002 Thomson Publishing. All rights reserved.
Background on Common Stock

Common stock = certificate representing equity
or partial ownership in a corporation
Issued in primary market by corporations that
need long-term funds
Stock is then traded in the secondary market,
creating liquidity for investors and company
evaluation for managers
Copyright© 2002 Thomson Publishing. All rights reserved.
Background on Common Stock
Ownership and Voting Rights

Owners of common stock vote on:
Election
of board of directors
Authorization to issue new shares
Amendments to corporate charter
Other major events
Many investor assign their vote to management via a
proxy
 Households own about half of all common stock, the
rest is owned by institutional investors

Copyright© 2002 Thomson Publishing. All rights reserved.
Background on Preferred Stock
Represents equity or ownership interest, but
usually no voting rights
 Trade voting rights for stated fixed annual
dividend
 Dividend paid before common if dividends are
declared by board of directors
 Dividend may be omitted

Cumulative provision
 If common dividend paid, preferred dividend fixed

Copyright© 2002 Thomson Publishing. All rights reserved.
Public Placement of Stock

Initial public offerings (IPOs)
First-time offering of shares to the public
 Firm must provide information to public

Registration
statement to SEC
Prospectus
Firm

is assisted by an investment banker
Performance of IPOs
Price
generally rises on first day
Longer-term performance of IPOs is poor
Copyright© 2002 Thomson Publishing. All rights reserved.
Public Placement of Stock

Secondary stock offerings


New stock issued by firm that already has shares
outstanding
Shelf Registration
1982 SEC rule
 Allows firms to place securities without the time
lag associated with registering with SEC

Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Secondary Markets
Organized Exchanges
Execute secondary market transactions
 Examples: NYSE, AMEX, Midwest, Pacific
 NYSE is largest, controlling 80 percent of value of
all organized exchanges

Must
own a seat on exchange in order to trade
Trading resembles an auction
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Secondary Markets
Over-the-Counter Market
No trading floor or specific location
 Telecommunications network
 Nasdaq

National Association
of Securities Dealers Automatic
Quotations
Thousands of small firms, plus high-tech giants

Pink sheets
Tiny
firms that do not meet requirements for NASDAQ
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Secondary Markets
Trend: Consolidation of stock exchanges
 Market microstructure


Specialists, floor brokers, and market-makers
Role

of specialists
Types of orders
Market
order
Limit order
Stop order
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Secondary Markets

Changes in technology
Online
trading
Real-time quotes
Company information
Electronic Communications Networks (ECNs)

Margin requirements
Specify
amount of borrowed versus amount in cash
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Secondary Markets

Purchasing stock on margin
Borrow
a portion of the funds from broker
Margin is the amount of equity an investor provide
Magnifies returns (both good and bad)

Short sales
Borrow
stock and sell
Repay stock loan, hopefully at a lower price
Investor able to have potential profit from decline in
stock price
Copyright© 2002 Thomson Publishing. All rights reserved.
Regulation of Trading on Stock
Exchanges
Securities Act
Of 1933 and 1934
Securities And
Exchange Commission
National Association
Of Securities Dealers
(NASD)
Regulate
minimum information for investor and
broker/dealer business practices
Circuit
breakers
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Quotation

Stock Quotation
52-week price range (high/low and YTD%
change)
 Stock symbol
 Dividend annualized and dividend yield
 Price-earnings ratio
 Volume in round lots
 Previous day’s price close and net daily change
 Remainders in cents, not eighths

Copyright© 2002 Thomson Publishing. All rights reserved.
Exhibit 10.6
YTD %
change
Hi
Lo
Stock
Sym
DIV
Yld%
PE
Vol 100s
Last
Net Chg
110.3
121.88
80.06
IBM
IBM
.56
.6
20
71979
93.77
11.06
Year-to-date
percentage
change in
stock price
Highest
price
of the
stock
in this
year
Lowest
price
of the
stock
in this
year
Annual
dividend
paid per
year
Dividend
yield, which
represents
the annual
dividend as
a percentage
of the prevailing stock
price
Priceearnings
ratio based
on the
prevailing
stock price
Trading
volume
during the
previous
trading day
Closing
stock
price
Name
of stock
Stock
Symbol
Change in the
stock price
on the previous trading
day from the
close on the
day before
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Indexes

Dow Jones Industrial Average
Price-weighted average
 30 large U.S. firms


Standard and Poor’s (S&P) 500
Value-weighted
 500 large U.S. firms

New York Stock Exchange Indexes
 Other Stock Indexes


Amex, NASDAQ
Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Indexes

Investing in stock indexes
Indexing
 Has become very popular

Lower
transactions costs
Studies find that actively-managed funds do not
outperform stock indexes

Examples of publicly traded stock indexes
SPDRs
 Diamonds

Copyright© 2002 Thomson Publishing. All rights reserved.
Stock Market Performance

Comparing stock performance to bond
performance
Copyright© 2002 Thomson Publishing. All rights reserved.
Investor Trading Decisions
Stock value = proportional value of total
company
 Investor return = dividend yield + capital
gain/loss
 New information translated into trading
decisions impacting supply/demand for shares
 New equilibrium price established until new
information appears

Copyright© 2002 Thomson Publishing. All rights reserved.
Exhibit 10.8
New
Favorable
Information
Disclosed
to Investors
New
Unfavorable
Information
Disclosed
to Investors
Increased
Valuation
of
Security
by Investors
Reduced
Valuation
of
Security
by Investors
Increased
Demand for
Security
Reduced
Supply of
Security
for Sale
Reduced
Demand for
Security
Increased
Supply of
Security
for Sale
Increase in
Equilibrium
(Market)
Price of
Security
Decrease in
Equilibrium
(Market)
Price of
Security
Copyright© 2002 Thomson Publishing. All rights reserved.
Institutional Participation in Stock
Markets

Program trading by institutions
Simultaneously buying and selling of a portfolio of at
least 15 different stocks valued at more than $1
million
 Most commonly used by securities firms
 Program refers to the use of computers
 Impact on stock volatility

Often
blamed for rise or fall in stock market
Studies show that program trading does not increase
volatility
Copyright© 2002 Thomson Publishing. All rights reserved.
Investor Monitoring of Firms in the Stock
Market

Shareholder activism
An
investor who is dissatisfied with the way managers
are running a firm has three choices:
Sell
Do Nothing
Flush!
Shareholder Activism
Copyright© 2002 Thomson Publishing. All rights reserved.
Investor Monitoring of Firms in the Stock
Market

Communication with the firm
Effort to place pressure on management
 Institutional investors

CALPERS
TIAA
Proxy contest
 Shareholder lawsuits

Copyright© 2002 Thomson Publishing. All rights reserved.
Corporate Monitoring of Firms in the
Stock Market

Market for corporate control
Stock price declines due to poor management
 subject to possible takeover


Barriers to market for corporate control
Antitakeover amendments
 Poison pills
 Golden parachutes

Copyright© 2002 Thomson Publishing. All rights reserved.
Corporate Monitoring of Their Own
Stock in the Stock Market

Stock repurchases
Dividend alternative or undervalued stock
 Excessive cash relative to +NPV investments


Leveraged buyouts (LBO)


If managers believe the stock price undervalued,
they may buy the outstanding shares with
borrowed funds
Stock offerings

Signals overvalued shares
Copyright© 2002 Thomson Publishing. All rights reserved.
Globalization of Stock Markets

Barriers to international stock trading have
decreased
Reduction in information costs
 Reduction in exchange rate risk

Foreign stock offerings in the United States
 International placement process
 Global stock exchange characteristics
 Emerging stock markets

Copyright© 2002 Thomson Publishing. All rights reserved.
Globalization of Stock Markets

Methods used to invest in foreign shares
Direct purchases
 American Depository Receipts (ADRs)
 International mutual funds
 World equity benchmark shares

Copyright© 2002 Thomson Publishing. All rights reserved.
Globalization of Stock Markets

Global diversification and integration among
stock markets

Integration of markets during the 1987 crash
All
major stock markets declined, indicating the
underlying cause systematically affected all markets

Integration of markets during mini-crashes
Example: August
27, 1998 “Bloody Thursday”
Russian financial crisis

Increased integration associated with
increased financial technology, competition,
and lessened government regulation
Copyright© 2002 Thomson Publishing. All rights reserved.