Capital Markets and Securities Financial Markets · A financial market can be defined as "the participants, commentators and facilitators which contribute to setting the price of a financial asset" • Participants • Investors • Traders · Commentators • Equity analysts and credit rating agencies • Facilitators · Exchanges and banks · Capital markets · Long-term securities (> 1 year from issue to maturity) · Money markets · Short-term securities (< 1 year from issue to maturity) · Derivative markets • Futures and options · Foreign exchange markets · Currencies and forwards Capital Market Securities · Securities are issued to investors for cash in the primary capital market by: · Companies - issue equities and bonds to finance growth · Governments - issue bonds to make up tax shortfall · The investor has legal rights to receive future cash flows from the issuer: · Equities - dividends and liquidation proceeds · Bonds - interest and redemption proceeds · Previously issued securities trade (are bought and sold) in the secondary capital market
Stock Exchanges · Infrastructure for and regulation of: · Primary market (issuance of "new" securities) · Secondary markets (trading of "old" securities) · Dissemination of: · Security prices · Corporate news · Index values · Settlement facilities Equity Indices Indices reflect prices of its constituent securities Country Main stock exchange Main indices Constituent companies 100 12 month performance +6% UK London (LSE) FTSE 250 FTSE 100 250 +12% USA New York (NYSE) Standard & Poor's 500 500 +18% Dow Jones Industrials 30 +25% The FTSE 100 Index · Price index weighted by market capitalisation · Quarterly reviews of constituents · Shares which trade on the LSE, e.g .: Rank 1 Royal Dutch Shell Company Sector Oil & Gas £191bn Market Capitalisation* 2 HSBC 3 BP 100 Babcock International Banking £153bn Oil & Gas £97bn Engineering £4bn * share price x no. of shares in issue Source: www.digitallook.com
Importance of Equity Prices • Directors are concerned about the price of the company's shares in the secondary market because: · Shareholder wealth creation · Financial efficiency · Remuneration (i.e. ESOPs) Equity Pricing and Intrinsic Value . The secondary market price of an equity is set by the interaction of participants when they trade: · Price rises when more buyers than sellers · Price falls when more sellers than buyers · Participants trade an equity because they have different opinions on its intrinsic value · The intrinsic value of an equity is: · Determined by the amount, timing and certainty of its expected future cash flows (dividends and liquidation proceeds) · Subjective and rarely the same as its price · Opinions on the intrinsic value of a company (and its share price) are likely to change when new information is made public by: · The issuing company (via a stock exchange) · Financial results and trading updates · Management changes · Mergers and acquisitions · Third parties · Close competitors · Economic data · Equity analyst forecast upgrades / downgrades