Lecture 5- The share market Flashcards
What is an emerging firm?
A business that aspires to grow into a company
How do small businesses grow into companies?
Through venture capital markets to finance its development
What are the two types of venture capitalists?
1) Business Angeles- wealthy, contribute to development
2) Venture capital fund managers- raise funds from super funds, and invest in a number of new businesses to spread the risk of a loss
What do preference shares offer?
Priority
What are the two methods of assessing the share value?
1) Technical analysis- past data to identify future trends or behavioural techniques
2) Fundamental analysis- attempts to estimate a shares fair value using pricing models
What are the two types of fundamental analysis?
‘Top down’ = global economy> economy> sector> industry> firms management
‘Bottom up’= financial statements and market data using ratios
What is the P/E ratio?
Price to earning- the share price divided by earnings per share
What does a higher P/E ratio indicate or a lower one indicate?
Higher P/E ratio= expectation earnings will grow quickly
Low P/E ratio= mean the earnings are risky
How do we forecast the future earnings?
Future= P/E (current) x earnings change (which assumes the earning change is permanent and the P/E ratio is unaffected by the earnings change)
What does Gordon’s dividend growth model sate?
The value of a share is equal to the PV of its future payments
What is an IPO and what is their purpose?
Initial public offering- the first issue of shares
What does the issue process involve?
1) Select a manager (arranger) for IPO» issue documents including prospectus» financial statements are prepared and audited» due diligence is performance- meaning any claims in prospectus are verified
Who are IPOs conducted under?
ASIC and ASX rules that require a prospectus
What is the purpose of the prospectus?
Accurate and comprehensive information and to help in the marketing of shares
What does the pricing phenomon state?
IPOs are typically underpriced- that is the UPO price is is less than the closing price on the first day of listing on the market ‘money left on table
How is additional equity raised?
Retained earnings, rights issue (existing shareholders), private placements (selling shares to one group)
What is the role of the ASX?
- Determines listing rules
- Trades ordinary and preferences shares
- As a secondary market- price discovery, liquidity and pools investor funds
What is corporate governance?
Managment of a business, supervision and accountability of management and the ways which stakeholders influence decisions
What is market discipline
Occurs where changes in a share price influence the behaviour of senior management
What kinds of orders does the ASX trade accept? Who has access to ASX trade
Limit or at market orders?
Only brokers have access- however they may have internet based systems that enable their clients to enter orders
What is chess?
The transfer and settlement system- where change in share ownership are recorded electronically, and where settlement occurs in t+3 (that is- three days later)
How do share price indicies contribute to price discoveries?
Revealing general price movements in share markets against he perfomrance of individual shares and active funds managers
