MAY 13

I n t r o d u c t i o n t o F i n a n c i a l M a r k e t s – F I N 4 A 1

BARET Charlotte, ZHENG GuangtingIs covered in this report the stockmarkets characteristics anda focus on Google’s current stock prices as for april 15th.

CONTENTS

INTRODUCTION

I. STOCK MARKET 3 REMINDER 3STOCK PRICING 4GENERAL STOCK MOVES 5

FOCUS ON GOOGLE INC. 6 PRICE MOVEMENTS OVER THE PAST YEAR 6FACTORS AFFECTING THE PRICE 7FORECAST 7

CONCLUSION 10

BIBLIOGRAPHY 11

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Introduction

This report covers the research did earlier this semester for the presentation on Stock Markets. The first part deals with the stock markets and their role and how prices are set. A second part specifically focuses on a case study on Google’s stock price movements and its forecast.(you can complete the introduction)

I. Stock Market

I.a. Reminder

A Stock Market is a place where stocks are traded between financial parties (individuals & institutions). There are multiple stock markets and among the biggest ones remain the following : Dow Jones, NYSE Index, S&P Indexes, NASDAQ, NYSE EuronextA Stock or Share represents the ownership in a piece of a company.It can be encountered three types of stock :- Common Stock/ Ordinary shares : A common stock means the shareholder has a piece of ownership in the company, he or she also has the right to vote on internal key issues, but may not receive dividends. - Preferred Stock/ Preference Shares : Preference shareholders are the first one paid by the company by means of dividends butthey do not participate in key issues and have no right to vote.- Convertible Securities : It can be convertible preference shares or convertible bonds. One good explanation of convertibles is that, for instance, there is a conversion of a bond into a stock. It can be done by calculations based on a ratio. For instance the ratio is 40 :1, it means that the 1,000dollars bond invested can be converted into 40 shares in the company (Pilbeam, 2010).

Another essential thing to know is that there are two types of markets, the primary and the secondary one. Issuing a stock in

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the primary market can be another way of saying ‘issuing a IPO for a stock’. The primary market is a place where newly issued stocks are traded directly from the issuing company.Secondary markets trades seasoned offerings via direct search markets, brokers, dealers, auction markets. What differentiate the secondary market from the primary market is that there is an intermediary between the company and the investor as the shares were previously invested (Pilbeam 2010).

I.b. Stock Pricing

(talk about pricing, and the categories of factors (definition of the factors), as well as the calculations )

I.c. General Stock Moves

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The graph above shows the returns on investment from 1964 to 2010 on 10,000 dollars invested. What strikes on this graph is that stocks appear to be more volatile and while bonds an savings make little return, stocks seem to have a way higher yield.The reasons for the significant swings on the stocks curve is that stocks are generally more volatile than any other asset because none of the other generate earnings from providing a good or service. And because it is hard to predict the price ofa stock, it is also essential to hold other assets to preserve the wealth, and this is what we call diversification. However, stocks, as it shows on the graph, make higher long term returnsand this is why stocks are essential for investors.

II. Focus On Google Inc.

II.a. Price movements

II.b. Factors

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Here are the factors that affect Google‘s stock price and how it played a role on its increase and swings.

Fundamental Factors

Company’s Performance

Source: Financial Times

Google is the leader of its market and its performance has kept raising over the past few years. Just by looking at these two graphs you see an increase from year to year on the revenueand the net profit. The performance plays a role in the share price. Investors will more likely trust and hold an asset of a company that is performing well.Moreover, the analyst Morgan Stanley states that Google is expected to grow its revenue by 20% each year (Chang, 2013).

An earnings base (earnings per share (EPS))

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The earnings per share ratio represents the portion of the company’s profit allocated to each outstanding share of common stock.

Source: Nasdaq

The table above shows that the earnings per share has increasedfrom 2010 to 2012. The profit allocated to each outstanding share has increased from 6.06 to 8.75. And as the company’s earnings grow the part allocated to shares grows too which canonly be attracting to investors.

a valuation multiple (a P/E ratio)

As for April 17th, the P/E ratio has increased since the mid 2010 to 24.16. A P/E ratio between 20 to 25 is the average in the stock markets. For Google, it means that the price of the share represents 24.16 times earnings per share. Investors can expect a higher earnings growth, this helps forecast the future price of a share (Ycharts, 2013).

Debt/Equity

Source: Financial Times

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The debt to equity shows if the company depends on banks, and you see on this graph that most of the capital of the company is owned by the company’s owners and shareholders. Just 7.17% of the equity represents the debt. Even though it has risen in three years it still represents a small part of the equity.

Technical Factors 

Inflation

The inflation is said to lower in the next few months, if it istoo low it might be bad for the United States and affect Google’s stock prices and lead to a decrease (Mackenzie, 2013).

Economic Strength of market peers

Even though Google is the leader of its sector, the sector is always evolving and more competitive. Companies like Amazon, LinkedIn, Yahoo are one of the many competitors of Google (InsiderMonkey, 2013). Moreover, its competitors are far from reaching Google’s performance. Yahoo’s first quarter earnings report is said to have C- grade, which is poor. One of the reason is that Yahoo’susers is way smaller than Google’s or Facebook’s (Cohan, 2013).

Global Issues

North Korea’s potential nuclear war could have left investors skeptical to buy shares, however most investors see the threat as a bluff. So it doesn’t really affect the stock price of Google. Actually, it is said that experts think Kim Jong Un is not going to launch any nuclear weapon (La Monica, 2013).

Market Sentiment

The Google is seen as a growth stock, so investors are quite confident it will continue to grow. Also, investors are quite

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happy with the new Google Glass project and are more than readyto invest on this project. (Harper, 2013)

II.c. Forecast

Conclusion

All in all, it has been said that stock markets are a source for companies to raise money and for investors to make return. Our case study on Google also shows that different factors affect the price of a share and each one to a different degree of influence.Bearing in mind the good performance of Google, and the trust of the shareholders, we predict that google shares will increase a little but not significantly in the next few months.

Bibliography

Pilbeam, K., 2010. Finance & Financial Markets. 3rd ed. Palgrave Macmillan.

THE MOTLEY FOOL, 2013. Google Inc (GOOG) : A simple case for stock. InsiderMonkey. [online] 14 April. Available at <http://www.insidermonkey.com/blog/google-inc-goog-a-simple-case-for-stock-116705/>

Chang, S., 2013. Google, IBM, Microsoft are Thursday’s big earnings. [online] 18 April. Available at

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<http://www.marketwatch.com/story/google-ibm-microsoft-are-thursdays-big-earnings-2013-04-18>

Cohan, P., 2013. 3 Reasons Yahoo’s Earnings Will Be A C-. [online] 16 April. Available at <http://www.forbes.com/sites/petercohan/2013/04/16/3-reasons-yahoos-earnings-report-will-be-a-c/>

Nasdaq, 2013. [online] 17 April. <http://www.nasdaq.com/symbol/goog/revenue-eps#.UW_Qm7_lNGI>

Financial Times, 2013. [online] 17 April. Available at <http://markets.ft.com/research/Markets/Tearsheets/Summary?s=GOOG:NSQ>

Mackenzie, M., 2013. .Financial Times [online] 16 April. Available At <http://www.ft.com/cms/s/0/2c0b7666-a6a7-11e2-885b-00144feabdc0.html#axzz2Qjihlm00>

La Monica, R., P., 2013. Should Investors be worried about North Korea ? CNN [online] 2 April. Available At <http://buzz.money.cnn.com/2013/04/02/north-korea-stocks/>

Ycharts, 2013. [online] April. Available At <http://ycharts.com/companies/GOOG/pe_ratio>

Harper, M., 2013. [online] 11 April. Available At <http://www.redorbit.com/news/technology/1112821041/google-investors-support-glass-collective-041113/>

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