Stock Exchanges / Cash Market (9) Flashcards
What is the STOCK EXCHANGE?
The STOCK EXCHANGE is the financial market where savers and lender meet, where the channeling of savings towards productive investment takes place, thus contributing to economic growth.
- is a financing instrument for companies
- is an investment instrument for savers
TWO IMPORTANT FUNCTIONS
- provides liquidity
- efficient valuation of financial instruments (through transparent conditions)
Which are the instruments used to finance shares?
How can we value them?
SHARES - ownership certificates that represent one of the equally divided parts in the K of a company. Future cash flows are unknown, meaning greater risk.
NOMINAL VALUE - historical value, when issued
BOOK VALUE - accounting value on BS, net assets - liar
MARKET VALUE - determined by supply and demand
LIQUIDATION VALUE - value without considering its contribution to the business activity
INTRINSIC/FUNDAMENTAL VALUE - current value of future cash flows
What rights do you acquire with the purchase of shares?
DIVIDEND RIGHTS
TRANSFER RIGHTS
PRE-EMPTIVE RIGHTS TO SUBSCRIPTIONS
VOTING RIGHTS (general shareholder meeting)
PRICING IN STOCK MARKETS
- NET ASSETS (K + reserves) between the #shares
- CURRENT VALUE OF DIVIDENDS
- FUNDAMENTAL ANALYSIS - P depends on the evolution of company profits compared with those of competitors. Using ratios like: Solvency, bank borrowing, liquidity, ROA, ROE…
- EQUILIBRIUM MODELS - CAMP (systematic risk and E[r] ) and APT (multi-factor)
What is an IPO?
INITIAL PUBLIC OFFERING
First public offering of a company’s shares. Companies have to meet some minimum requirements regarding SIZE and ACTIVITY so that they are attractive enough to a reasonable number of investors.
phases of an IPO?
- Decision - Board, GS Meeting
- Docs sent to CNMV + Approval by CNMV
- Company fixes P range + Demand survey
- P is fixed + Sale
Advantages and Disadvantages of IPO?
ADVANTAGES
- Access to a new type of financing
- Increased prestige (trading in formal markets)
- Sign of increased transparency and market discipline
DISADVANTAGES
- Direct costs: consultancy, market research, lawyers, commissions…
- Requirements for provision of information: inform the market about any decisions that might change the value of the company
- Underpricing: issuer tends to ask for a discounted P
What is the SIBE?
The Spanish Stockmarket Interconnection System 1995
- order-driven market
- real-time information on the screen
- automatic reporting of trading info
What are the main characteristics of the SIBE?
- single P in each security
- continuous trading (8 and a half hours)
- opening and closing auctions (eq P, placed but not carried out)
- currency = euros €
- Tick = 0.01 € (in case of subscription rights)
- order of orders according to P and timing
- 2 main phases: OPEN market and SUSPENDED market
TYPES OF ORDERS
MARKET ORDERS
no specific P limit, traded at best P, if there is no counterparty, orders wait in the order of the book waiting
STOP LIMIT ORDERS (STPLMT) or BEST P ORDERS (BPO)
no P, limited to the best BID from the opposite side, if there are no orders the order is rejected
LIMIT ORDERS
to be executed at their limit P or better (buy order = limit or lower)
HIDDEN VOLUME ORDERS
allow participants to place orders without disclosing the full amount to the market (avoid adverse P movements, lo vas colocando poco a poco)
TYPES OF ORDERS by conditions of execution
EXECUTE OR CANCEL
% of the order that finds matches will be executed and the rest will be rejected
MINIMUM VOLUME
min amount to be executed or whole rejected
FILL OR KILL
min amount = total order; or whole rejected
ORDERS MODIFICATIONS once orders are entered…
MODIFIED
P modification and increases in volume lead to a loss of priority for the order. (no direction modifications sale–purchase)
CANCELLED
it is possible to cancel the outstanding part
MATURITY OF ORDERS - it is possible to set duration
- valid for the current session
- valid until a set date
- valid for 90 days
What is the OPEN market?
OPEN MARKET; orders are placed and executed
There’s different trading possibilities…
- continuous order-driven market
- trading of securities with single set prices (fixing, instruments in ongoing auction, quoted for the whole session = + efficiency - volatility)
There are different sections that attempt to cover the peculiarities of certain customer or of certain securities.
- LATIBEX: Latin American securities quoted in € and in SIBE
- BLOCK TRADES MARKET: large volume operations
- SPECIAL OPERATIONS MARKET: operations after the orders market closes, cash and P requirements
- ALTERNATIVE STOCK MARKET (MAB): for companies with low capitalisation and collective investment schemes
What is the SUSPENDED market?
SUSPENDED MARKET; orders are placed not executed
- OPENING AUCTION: 30mins with a random end of 30secs
order of the book is partially visible, no execution of orders, only eq P is shown - CLOSING AUCTION: 5mins with a random end of 30secs
closing P – key info and underlying instrument for derivatives - VOLATILITY AUCTION: 5mins with a random end of 30secs
to correct a rise/fall that moves outside of the normal trading limits set by the Stock exchange (doesn’t avoid Sharpe movements)
(Static ranges // Dynamic ranges)
What are STOCK MARKET INDICES?
Securities quoted P fluctuate continually and these aren’t parallel, this is why having indicator or instruments SUMMARISE THE AGGREGATE MOVEMENT of P in these markets.
- informative role
- benchmark for portfolio management
must achieve REPRESENTATIVE AND GENERALITY
(members of indices will be weighted by stock market capitalisation or by the P of their own shares)
Examples: IGBM, IBEX-35 (most liquid securities in the continuous market, weighted by capitalisation)
“Technical Advisory Committee” takes into consideration the trading volume €, quality, market capitalisation and floating rate…
