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STOCK MARKETS &

VALUATION

What is a Share ? • A share of stock is literally a share in the ownership of a

company. When you buy a share of stock, you're entitled to a small fraction of the assets and earnings of that company.

– Assets include everything the company owns (buildings, equipment, trademarks)

– Earnings are all of the money the company brings in from selling its products and services.

Why issue Shares ?

• Because it needs the money!

– Companies only have two ways to raise money to cover start-up costs or expand the business: It can either borrow money (a process known as debt financing) or sell stock (also known as equity financing).

Why not Borrow Money? • The disadvantage of borrowing money is that the

company has to pay back the loan with interest • By selling stock, however, the company gets money

with fewer strings attached. – There is no interest to pay and no requirement to

even pay the money back at all. – Even better, equity financing distributes the risk of

doing business among a large pool of investors (stockholders).

– If the company fails, the founders don't lose all of their money; they lose several thousand smaller chunks of other people's money.

An Example • Let's say that you've always dreamed of opening a

restaurant. You love food , and you've done your homework to figure out how much it would cost to launch a new restaurant business and how much money you could expect to earn each year in profit.

• You Don’t have any money!!!

Expenses Income

Building Cost 5,00,000 Earnings 3,25,000

Annual Expenses 2,50,000

An Example • This is the logic that companies

use when they make the decision to issue stock to private or public investors .

• They believe that the company will be profitable enough that investors will see a good return.

• In this case, if investors paid a

total of INR 750,000 for shares in the restaurant, they could expect to earn INR 75,000 annually. That's a solid 10 percent return.

The Role of an Investment Bank

• This is the logic that companies use when they make the decision to issue stock to private or public investors . They believe that the company will be profitable enough that investors will see a good return.

• As the owner of the restaurant, you can set the initial price of the company, as well as the total number of shares of stock you want to sell.

This is where an Investment Bank comes in..

• The Red Herring Prospectus

• IPO

The Role of an Investment Bank

Stock Attractiveness

• If you issue a lot of shares, that would lower the price of each individual share, perhaps making the stock more attractive to lone investors.

• Another consideration is ownership. Each person who buys a share of stock essentially owns a piece of the company and has a say in how the company is run.

The Stock Market • You have now decided to recruit a pool of investors, where

would you find these people? You could place an ad in the paper or online, or you could simply contact friends and family.

• But what if some of your initial investors decide a year later that they want to sell their shares?

– They would each have to go out and find a new buyer, which might prove difficult, especially if the company isn't performing very well.

The Stock Market

• A stock market solves this problem. Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange).

• Modern stock exchanges make buying and selling easy. You don't have to actually travel to Mumbai to visit the Bombay Stock Exchange. You can call a stock broker who does business with the BSE , or you can buy and sell stocks online for a small fee.

STOCK MARKET

Primary market:

The primary market is where securities are created (by means of an IPO)

Secondary Market

Where investors trade previously-issued securities without the involvement of the issuing-companies.

The secondary market is what people are referring to when they talk about "the stock market."

The Indices

Stock Exchange Market Cap (in US$

trillion) Percentage rise in market cap over 1 year *

NYSE 19.2 12

Nasdaq 6.84 19

Tokyo Stock Exchange 4.43 -0.8

Euronext 3.37 -3.2

Hong Kong Stock Exchange 3.26 8

Shanghai Stock Exchange 2.96 18.7

TMX, Canada 2.14 1.7

Shenzhen Stock Exchange 1.95 41.5

Deutsche Borse 1.69 -6.8

BSE India 1.58 41.6

National Stock Exchange India 1.55 42

Swiss Exchange 1.51 0.3

Australian Stock Exchange 1.41 -3.2

Korea Exchange 1.23 -0.7

The Indices…BSE • SENSEX is India's first Index compiled in 1986. It is a basket of

30 constituent stocks representing a sample of large, liquid and representative companies. The base year of BSE-SENSEX is 1978-79 and the base value is 100.

• (Sum of Free Float Market Capital / Base Market Capital ) x

100

• The BSE constantly reviews and modifies its composition to be

sure it reflects current market conditions.

The Indices…BSE • The index is calculated based on a free float capitalisation

method, a variation of the market capitalisation method. Instead of using a company's outstanding shares it uses shares that are readily available for trading.

• As per free float capitalisation methodology, the level of index at any point of time reflects the free float market value of 30 component stocks relative to a base period.

• The market capitalisation of a company is determined by multiplying the price of its stock by the number of shares issued by it.

The Indices…BSE

The Indices…BSE

The Indices…NYSE/NASDAQ

• Known as ‘The Big Board’ • The world’s largest by way of Market Capitalization • Also one of the world’s most expensive to list! • Why did LinkedIn choose to list on NYSE rather than NASDAQ?

• Facebook - NASDAQ over NYSE

The Stock Market • Stock exchanges have an interesting side

effect. Because all the buying and selling is concentrated in one place, and since it's all done electronically, we can track the constantly fluctuating price of a stock in real time.

• Investors can watch, for example, how a stock's price reacts to news from the company, media reports, national economic news and lots of other factors.

The Stock Market Regulator • All publicly traded companies need to issue

quarterly earnings reports through the Securities and Exchange Board of India (SEBI).

• Functions of SEBI

• To protect the interests of investors in securities;

• To promote the development of Securities Market;

• To regulate the securities market

The Shareholders • Shareholders are the people who own shares of stock

in a company.

• Collectively, the shareholders are the owners of the company, since each share of stock entitles the owner to a say in how the corporation is run.

• Shareholders elect a board of directors to make the company's major decisions, such as the number of shares to be issued to the public.

The Shareholders…The Risk • Interestingly, not all corporations decide to have

public shareholders.

• Corporations can choose to be privately or publicly held. In a privately held company, the shares of stock are all owned by a small group of people who know one another. They buy and sell their shares amongst themselves.

• A publicly held company is owned by thousands of people who trade their shares on a public stock exchange

STOCK VALUATION

Manchester United….

LBO… • Was floated on the stock exhange in 1990..

• Multiple Change of Ownership

• In 2005 , Went Private due to Glazer’s takeover

How did the Glazer family get the money?

Debt!

The after effects !

A Great Book…!

Making Money…

• If the corporation chooses to pay an annual dividend, then shareholders will receive a cut of the profits every year.

• Very few young companies issue dividends, however. They're more likely to issue growth stocks, in which all of the profits are reinvested.

• In this case, shareholders are banking on the fact that the right corporate management will help the company grow and generate even more profit.

• It's this potential for future success that will help determine the stock price on the open market. And if the shareholder holds onto a growth stock for long enough, he could eventually sell it for a significant gain.

Share Prices • Stock prices aren't fixed. From the

second a stock is sold to the public, its price will rise and fall based on free market forces.

• It is these ever-shifting market forces that make short-term movements of the stock market so difficult to predict.

• And that is precisely the reason why short-term stock market investing is so risky.

Share Prices • After all, it's the change in a stock's price over

time that determines its ultimate value to shareholders. The key to investing is "buy low, sell high."

• You want to buy a stock at INR 2 a share and then sell it when it's INR 20 a share.

• The safest way to buy low and sell high is to invest in a slow growth stock -- usually an established company with a long track record of success like Infosys or Reliance -- and hold onto it for many years.

The Animals..! • The Bulls A bull market is when everything

in the economy is great, people are finding jobs, GDP is growing, and stocks are rising

• Employment, increments and greater disposable income creates greater demand for investment options and hence raising the price of shares – directly or indirectly.

The Animals..! • The Bears A bear market is when the economy is bad, recession is looming, and stock prices

are falling. Bear markets make it tough for investors to pick profitable stocks.

• One solution to this is to make money when stocks are falling using a technique called short selling.

• When you short sell a stock, your broker will lend it to you.

– The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm.

– The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker.

– If the price drops, you can buy back the stock at the lower price and make a profit on the difference.

• Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market.

So How Do I Value A Stock? • Technical Analysis

An security analysis methodology for forecasting the direction

of prices through the study of past market data, primarily price

and volume

So How Do I Value A Stock? Fundamental analysis

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets.

• Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out.

• Contrarian investors "in the short run, the market is a voting machine, not a weighing machine".

• Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.

A Value Investor…

A Great Book…!

So How Do I Value A Stock?

Behavioral Finance Behavioural Finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets

A Great Book…!

Other Options.. • Stocks

• Bonds

• Derivatives

– A derivative is a financial contract which derives its

value from the performance of another entity such as

an asset, index, or interest rate, called the "underlying“

• Futures Contract & Hedging

• Options

A Great Book…!

A Great Book…!

MBAs and Money

Thank You