LECTURE 1: CAPITAL MARKET

Transcription

1 LECTURE 1: CAPITAL MARKET TYPES OF CAPITAL MARKET a. Stock market (NYSE, LSE, KLSE) b. Bond Market (NYSE FIM) c. Over-the-counter market (NASDAQ) d. Private Placement (via Investment Banks) IMPORTANCE OF CAPITAL MARKET a. Provide an avenue for businesses and government to tap money from the investors (primary market) b. A place for price discovery where all players can find out the market value of corporations (secondary market) PLAYERS IN THE MARKET a. Pension Funds (EPF, CALPERS, CPF etc) b. Insurance Companies (AIA, John Hancock, Prudential etc) c. Mutual and Trust Funds (KL Mutual Fund, ASB, ASN, UM Endowment Fund) d. Government Investment Corps (SEDC, Khazanah Nasional, MoF Inc, Temasek) e. Nominee Companies (Citibank Nominees Holdings etc) f. Investment Bankers (Morgan Stanley, Solomon Smith Barney etc) g. Individuals (Retail) CHARACTERISTICS OF A GOOD MARKET a. Availability of information b. Liquidity ability to buy and sell an asset quickly, which requires sufficient quantity of of tradeable assets as well as buyers and sellers c. Price continuity d. Low transaction cost e. Rapid response to new information CALCULATION OF MARKET INDEX a. Price Weighted (DJIA) b. Price Relative (FT 100-Ordinary Share Index) c. Market Capitalization (Most indexes round the world) 1) Price Weighted Index Example: Goondy PW Index is made up of 5 stocks of Company A, B, C, D and E. Figures are in $/share. Company A B C D E Remark Price t Each companiy has 10,000 shares Price t Company A announced 2-for-1 split Price t

2 Price t Company A announced 5-for-3 split Price t Calculate Goondy PW Index for each time period. 2) Price Relative Index PRICE RELATIVE = PRICE AT t = n ADJPRICE AT t = n 1 PR = n A B C D E ( PR )( PR )( PR )( PR )( PR ) 100 Using the same data in part 1, calculate Goondy GW Index for each time period. 3) Market Capitalization Index MC = Market Cap at timet Market Cap at 100 Base Period Assuming t 0 is the base period, calculate Goondy MC Index for each time period. EFFICIENT MARKET HYPOTHESIS Before discussing the concept of EMH, you need to appreciate that there are two kinds of analysis: a. Fundamental analysis tries to determine the value of a stock by determining the future earnings of that company. In doing so, the analyst needs to understand the impact of macroeconomic variables on the industry, the competitive landscape of the industry, the strength and weaknesses of the company before projecting the market share and sales volumes of that company, as well as its net profits. b. Technical analysis uses price trends to determine the right time to buy or sell a stock. Various techniques are used to identify turning points that signal upturn or downturn of stock prices. Efficient Capital Market is a market in which security prices adjust rapidly to the arrival of new information. This means the prices of all securities reflect all information about that security. Assumptions behind Efficient Market Hypothesis a) Large number of competing, profit-maximizing participants analyze and value securities. b) New information about any particular securities comes to the market in random fashion. c) Competing investors attempt to adjust security prices rapidly to reflect the effect of new information.

3 Impact of Efficient Market Hypothesis 1) Because information is reflected in prices immediately, investors should only expect to obtain normal rate of return, ie. return that commensurate with the potential future cashflows and underlying risks of the company. Nobody has the advantage of receiving information earlier than others, and nobody has the advantage of being able to respond faster than others to new information. It also suggests that no investor can beat the market consistently over a long period of time. 2) Company should only expect to receive fair values of their securities. Therefore as a company, you cannot fool the investors by selling an overpriced securities of your company. Academicians categorize the markets into three types based on the efficiency of information dissemination as well as the efficiency of investors making use of the information in valuing the securities in that market. Three categories of Efficient Markets a. Weak Form b. Semi-Strong Form c. Strong Form 1) Weak-form EMH Current stock prices fully reflect all historical market information about the stock, eg. historical prices and traded volumes. This means that past trends in share transactions cannot be used to make abnormal profits from the market, ie. it renders technical analysis useless. Some notes on technical analysis: a. Dow Theory b. Head-and-Shoulder c. Support-and-Resistance Levels d. Moving Average 2) Semi-strong form EMH Stock prices fully reflect all market and public information about the company. This include historical prices, traded volumes and non-market information like earnings and dividend announcements, stock splits, new projects, new products, appointment of new members of board of directors, industry news and political news. Investors who based their decision on the new information after its release to the public will not be able to derive abnormal profits from transactions of the stock of that company. 3) Strong-form EMH Stock prices fully reflect all information, both from public and private sources. No group of investors have monopolistic access to information relevant to the formation of prices. It assumes that nobody can even make abnormal profits by having inside information. Because all information are disemminated rapidly and equally to all investors, and investors in turn responded by adjusting their stock prices rapidly, it

4 basically means that nobody can consistently gain abnormal profits from the stock market over a long period of time. In other words, you can t beat the market all the time. NOTE: Stock Market Regulations and Efficient Markets 1) Throughout the world, stock exchanges, through Securities Regulations, require companies that are listed on their exchanges to disclose information about themselves. This include: a. Quarterly release of financial statement b. Disclose any purchase or sales of company stocks by member of directors c. Public statement of response to any significant rumour in the market 2) Computerization of trading to enable immediate transaction and cheap transaction costs. 3) Heavy penalties on individuals who profit from inside information. The above requirements attempt to provide level playing field for all investors, and to create more efficient market. About Stock Markets The most important stock market in the world is NYSE. United States is the frontier of capitalist system, and it has the biggest economy in the world. We frequently see two indexes quoted from NYSE: Dow Jones Industrial Index (DJIA) and Standard & Poor 500 Index (S&P500). DJIA is made up of 30 companies whereas S&P500 is comprised of 500 companies. Because of stringent requirements imposed on companies listed on NYSE, many companies opt not be listed on that exchange. Rather, they make available their shares to brokers. These brokers created their own computer network to trade among themselves, called National Association of Securities Dealers Automated Quotations (NASDAQ). Infact, companies like Microsoft, Apple Computers and Intel, which did not qualify to be listed on NYSE in the early days, are now more than qualified to be on the prestigious NYSE. However, these companies decided to remain with NASDAQ. About KLSE The history of KLSE can be traced back to 1960 when the Stock Exchange of Malaysia was formed. However, the real KLSE was formed in 1973 when the Ringgit and Sing$ were no longer interchangeable at fixed rate. However, many companies in both Singapore and Malaysia opted to be listed in both exchanges due to the link up between KLSE and SES. In 1990, Malaysia decided to de-link from SES and requested all listed companies to decide either to be listed in KLSE or SES. However, Singaporeans continued to invest in KLSE via CLOB (Central Limit Order Book) until 1998, when it was closed down by the Malaysian government. The electronic transfer of share ownership began in 1993 when the government introduced CDS (Central Depository System).

5 KLSE now has 861 listed companies (Main Board: 558, Second Board: 294, Mesdaq: 11). Some companies are related to each other, eg: a. YTL Corp, YTL Cement, YTL Power, YTL e-solutions & Taiping Consolidated b. Renong, Ho Hup Construction, Commerce-Asset Holdings Berhad, Time Eng c. Petronas Dagangan, Petronas Gas, Malaysian International Shipping Corp Big companies are typically listed on Main Board, whereas smaller companies are listed on Second Board. Another board was created in 2002 to cater for technology firms, called Mesdaq (Malaysian Exchange of Securities Dealing and Automated Quotations). The most important index is KLSE Composite Index, which is made up of 100 selected stocks listed on the Main Board. KLSE Listing Requirements Requirement Main Board Second Board Mesdaq Paid-up capital Min RM60 mil Min RM40 mil Min RM2 mil Net profit history (RM mil) Cumulative for the past 5 years Min RM30 mil Min RM12 mil Not required Most recent financial year Min RM8 mil Min RM4 mil Not required Number of shareholders Percentage of shares offered to public Max 100% Max 100% Max 49% Others Compliance to Bumiputra policy Stock Market and The Economy Stock markets and the economy are interrelated to each other. A higher market index reflect higher stock prices. Higher stock prices indicate the strength of companies current and future earnings. When economy is in recession, corporate profits will be small and prospect for higher earnings will be weak. This will lead to lower stock prices and lower market index. The reverse will be true when the economy is in the uptrend.