Lecture 7 Flashcards
What is the ASX?
Includes shares, debt and derivatives. Grew from smaller state institutions to a large one (15 in world). 2000 listings, market cap of 1.5 trillion and 4 billion in daily turnover
What are the principle functions of a modern stock exchange?
establishment of markets in a range of financial securities
provision of a securities trading system
operation of a clearing and settlements system
regulation and monitoring of the integrity of the
exchange’s markets
provision of a well-informed market, to secure the
confidence of participants.
What is the primary market?
To ensure the orderly sale of new-issue shares
What is the secondary market?
Main role: buying and selling of shares
shareholder to sell broker to buy broker to shareholder
the ASX trading system facilitates this
Why is the secondary market important?
Great significance to corporations trying to raise equity in the future.
Active, liquid and well organised secondary encourages purchases of new-issues in the primary.
How do you measure share market liquidity?
Ratio of the value of turnover to the market cap
In deep liquid market corps can raise equity cheaper and less risk for shareholders
What are the base rules for listing on ASX
- Minimum standards: size, quality, operation
- Investor interest must be demonstrated
- Must be issued in fair circumstances
- Must have fair rights and obligations attatached
- Information must be provided in timely manner
- Material information likely to affect price must be disclosed immediately
- Information must be produced to highest standard
- Highest standards of integrity, accountability and responsibility must be maintained.
- Practices to protect shareholders must be adopted
- Shareholders must be consulted on matters of significance
- Transactions must be commercially certain
What is market information with examples?
Published in paper/web: ASX Code Day high/low price last sale rise or fall in price vol in hundreds traded that day
Who supervises the share market?
ASIC: Supervision of Corporations Act, market integrity, consumer protection and covers investment, insurance and superannuation
ASX: Ensure listed companies follow rules, Admit new market participants
Supervise clearing house and settlement participants
What is the informational role?
Information must be disclosed immediately. Examples:
change in financial forecasts or expectations
appointment of receiver, manager, liquidator or administrator
recommendation/declaration of dividend
notice of takeover bid or share buy back
How are shares taxed?
Company pays tax on dividends = franked
For personal = dividend is grossed up by franking credit and total amount included in assessable income
Shareholder can receive tax rebate to value of franking credit
How is capital gains tax involved?
Shares sold under 12 months holding incur full personal tax rate, over 12 is different and capital losses can be offset against future capital gains
What is a stock market index (bull and bear)?
Provides measure of overall sharemarket as well as industry. Bull is indices rising, bear is indices falling.
Most exchanges have rules to stop trading if market rises/falls by a nominated percentage so time can allow rationality to return to the market and avoid panic
Price weighted v capitalisation weighted indices?
PW index: weighting is proportional to company’s share price
CW index: weighting is proportional to its market cap
Price index v accumulation index?
Price index: measures changes over time in the price of shares include in the index
Acc index: same as above but includes dividends received
What are the 10 categories of sector indices?
GICS indices: The ten industries are categorised as Energy, Materials,
Industrials, Consumer Discretionary, Consumer Staples,
Health Care, Financials, Information Technology,
Telecommunication Services and Utilities.
What are indices used for?
Derivatives, benchmarking performance and index funds
What are the two risks of investing in shares?
Systematic Risk: affects wide range of shares on market
Unsystematic risk: affects this share only. Investors will minimise unsystematic risk by diversifying portfolio but systematic will remain.
What is portfolio return and risk?
Expected return = weighted average of expected return of each share. Risk is measure using standard deviation of return.
Active v passive management?
Active: buying or selling shares that you believe are under/over valued because of market inefficiency
Passive: building portfolio based on risk preference and doing little to it
What is asset allocation?
The mix of assets and investor has in their portfolio. Issues to consider:
Risk versus Return
Investment time horizon
Income versus Capital Growth
Domestic and International share investments
Other constraints (e.g. Ethical Investing)
What is ethical investing?
Avoiding companies because you think they’re unethical. Pros: Might follow market if everyone thinks it, makes you feel good,
Cons: possible lower return and liquidity or loss of diversification
What is strategic asset allocation?
Structuring a portfolio to meet an investors risk preference. Gives long term mix of assets
What is tactical asset allocation?
Structuring portfolio to reflect the changing investment environment. Will result in changes to long term mix to meet current circumstances.
Top down fundamental analysis?
Broad country and asset class allocations Sector allocation decisions Individual securities selection
Bottom up fundamental analysis?
securities that the investor thinks were undervalued
