IPO the first sale of stock to the public by a company (raises capital and allows existing owners to take equity out of the company) Corporate Bonds debt issued by a company to raise capital
Carries preset interest rate Has priority over stock and preferred stock in bankruptcy proceedings
Derivative an asset that is priced on the basis of another product, e.g. stock index futures are priced based on the prices of the stocks in the index
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Other Terms: I
Long, go long, long position to buy and thus own an asset
If you buy Bank of Beijing shares you are long the Bank You can be long by buying the asset itself or, often, a derivative product that is priced from the asset, e.g. stock index futures or options
Short, go short, short position to sell an asset that you do not own
May occur by selling short (we will talk about this later in the course) or by selling a derivative product such as a futures or option contract
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Other Terms: II
Bull a person who believes that price of an asset such as stocks will rise
Bulls like bull markets
Bear a person who believes that the price of an asset will decline
Bears like bear markets
Exchange traded fund a fund (e.g. a bundle of stocks) that tracks the prices of its components
The SPY is an ETF that contains all of the stocks in the Standard & Poors 500 Index and thus tracks the index
Mutual Fund a fund that contains a large number of components such as stocks, bonds, etc
Unlike ETFs, (almost all) mutual funds cannot be traded during the day but only on the basis of closing prices of the components
Secondary offering an issue of new stock by a company that is already listed for trading (and previously had an IPO); raises new capital and dilutes existing ownership
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!. Do you own stocks? If yes, approximately how frequently to you trade: 1/wk, 1/month, 1/year
2. Do you think you own more stocks than your parents did at your age? 3. At age 35, what proportion of your assets would you like to have invested in stocks <10%, 10 25%, >25% Why did you choose this amount? 4. What proportion of the population in your country do you think owns stocks <10%, 10 25%, >25% 5 Over the coming 10 year period, what level of return do expect an investment in stocks to achieve? Negative, 0 5%/year, 5 10%/year, 10 20%/year, >20%/year 6. Which stock exchange (SE) is larger: the Tokyo Stock Exchange, the Taiwan Stock Exchange, or the Shanghai Stock Exchange? On what basis did you answer this question? 5/4/2012 Fin 594 - Fall 2011
Another method of Comparing Sizes Turnover Ratios Stock Exchanges: Wealth, Equitization and Stock Ownership
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Was also international in scope non-Roman citizens could participate Fall of Rome ended this early, and limited, development of equity markets
Next 1000 1200 years saw a different type of economy in Europe: capital was fixed (land, livestock, implements), credit little used, no class of investors in part because of Christian religious opposition to buying and selling for profit (doctrine of fair price)
SEs had the same dual function in 1600s and 1700s as today:
Capital raising and allocation, e.g. Br East India CO, Bk of Eng, Hudsons Bay Co, etc) Limited liability for share owners Speculation/investment (and people trying to define the difference)
These early SEs were of limited importance to their economies and citizenry
Financial assets not yet a significant form of wealth Commodity exchanges more common
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Investors are no longer partners and have only limited risk Form of wealth holding begins to change Today initial public offerings (IPOs) equitize a business
(2) Centralization
Information flows to and is acted on at one location (physical/virtual)
What are the advantages of a centralized market?
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Crashes impact the rest of the economy (the real economy) and in turn are impacted by it
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The 1929 Crash and the Great Depression ended this first wave of SE globalization The impact was global and long lasting
In 1939 NYSE ADV <1,000,000 first time since early 1920s Foreign listings in London dropped to less than 10% of the total The command economy of Nazi Germany and Fascist Italy allocated a minor role to SE; Japans SEs closed In 1928 17% of Harvard Business School grads entered the investment bus in 1940 only 4.4 % did so DJIA net gain 1900 1941: 57% (<2%/yr)
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Internationally:
Unemployment jumped and GDP fell (similar to US levels in many cases) Many countries sought to restart economies by creating tariff walls to protect their economy Countries went off gold standard Countries defaulted on sovereign debts
Was the 1930s Great Depression unique, or part of a pattern return to this later
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DJIA
41 19 38 19 35 19 32 19 29 19 26 19 23 19 20 19 15 19 12 19 09 19 06 19 03 19 00 19
DJIA 12/31 CLOSE
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SEs became a core element in financial systems, both at the national and the global level SEs as business in their own right with much recent M&A activity (e.g. NYSE/Euronext, London SE/Italien Borse)
Size of SEs is one simple and impressive measure of this increased importance
One common size measurement is simply volume of trading, i.e. the number of shares that change hands
What are problems of comparison?
By any measure the growth of stock exchanges in the past 35 years have been phenomenal
Capitalization of SE listed companies has increased 18 fold since 1975 However, turnover the value stocks traded has increased 100 fold in the same time period
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NYSE NASDAQ Tokyo SE London SE EuroNext Shanghai Hong Kong TSX Bombay BM/Fbovespa Nat't SE - India ASX
21
$US Billions
Growth in number of listed companies (over 40,000 listed companies word wide) SEs vs size of economy (national and world comparisons) SEs increased role is also evident via new prominence given to the stock market in news reporting
What did the market due today? always about the stock market
Result has been proliferation of measures of market performance, i.e. stock indexes Both third parties and SEs seek to establish their index as the reference benchmark
Dow Jones, FTSE, CAC, Nikkei, DAX have become household names
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Capital Raised by IPOs, Largest SEs, 2006, 2007, 2008, 2009 and 2010
$800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2006 2007 2008 2009 2010
$US Millions
A us tr
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H on
B M
bo ve sp B M a E (S pa in ) N A SD Sh A Q an gh ai SE
SE
N YS
SE g al ia
on
Lo nd
K on
/F
SE
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Growth in the World Equity Market vs Growth in World GDP, 1975 - 2009
Market Cap and Value Traded vs GDP
120000 100000 Value Traded 80000 & Mkt Cap 60000 ($ billions) 40000 20000 0
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19 75 19 80 19 85 19 90 19 95 19 97 20 02 20 05 20 06 20 07 20 08 20 09
Year Market Cap Value Traded World GDP
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These are the largest SEs and account for much of the total world equity market capitalization and value of trading Also leaders in IPO issuance to raise additional capital
In addition, these SEs are increasingly reorganizing as for profit entities and acting as for profit businesses seeking growth
Mergers of SEs in Europe to create EUREX, NOREX and EuroNext, NYSE/Euronext merger, NASDAQs failed bid London SE, Dhubai SE bid to acquire part of NASDAQ, etc.
Return to SE M&A later in the course
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$ Trillions
30
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Is this simply a recreation of that earlier pattern or has equitization and thus stock market activity spread to other areas of the world? Examine established market share of world equity market over time points to the second trend that accounts for growth in the post-WW II world equity market Dispersion of equity market cap and trading share out of established markets is primarily a trend of the past 25 years
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Founded
1929/1986 1875 1985 1956 1890s/1990 1990 1962
Stock Ex of Thailand
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1962/1975
$100.6
$140.2
35
Founded
1929/1986 1875 1985 1956 1890s/1990 1990 1962
Johannesburg Stock Ex
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1962/1975
$340.0
$925.0
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Emerging Markets
There is also a third group of markets that have developed in the past 3 decades emerging markets
These include Eastern Europe: Poland, Hungary, Czech Republic Also Africa: Egypt, Malta, Iran
A large number of new SEs in emerging markets but still a small portion of market capitalization and traded value
Future growth? Impact of 2008 world market collapse?
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Spain
S. Korea Italy Taiwan Netherlands Swede India Hong Kong S, Africa
11
15 9 17 7 12 21 14 18
11
12 13 14 15 16 17 18 19
Russia
32
20
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Traded value and market cap can be combined to create a measure of market activity called the turnover ratio How to calculate turnover ratio: traded value divided by market capitalization (TV/MCap)
Traded value usually an annual measure Market Cap usually as of close of the year
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In 2009, total traded value on the Shenzhen SE was $2,774 billion while year end market capitalization was $868 billion
What was the turnover ration for the Shenzhen SE in 2009?
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On a world wide basis this same calculation can be made over time to assess shift in activity
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Ten Most Active SEs, 2005 2009 (listed issues, 2005 as benchmark)
450 400 350 300 250 200 150 100 50 0
Turnover %
*In 2008 & 2009 NASDAQ included trades in non-NASDAQ listed stocks; the actual turnover ratios are estimates
A N
nb ta Is
SE an iw SE Ta ul
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19 75 19 80 19 85 19 90 19 95 19 97 20 02 20 05 20 06 20 07 20 08 20 09 20 10
Market Cap Value Traded
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Equities as Wealth
What are the advantages of holding wealth in the form of equities?
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Process of this transformation requires larger finance sector to structure and securitize assets into financial assets
Can financialization
May be one problem revealed by 2008 financial crisis
Profits of financial sector were only 14% total corporate profits in 1981 vs 40 - 45% in 2000 05
Similar trends occurred in other nations: outcome is increased holding of wealth in the form of financial assets including stocks
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We will analyze the impetus behind this shift later in the course
Direct Ownership
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Total Ownership
50
Control for population and economic growth by comparing market cap to GDP on a per capita basis
US: growth in GDP/capita and market cap/capita parallel until early 1990s new pattern emerges as equity market becomes more important mechanism for wealth holding and creation
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US Equitization: Per capita GDP vs Per Capita Market Cap, 1980 - 2008
$70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0
19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08
Broadly, older markets have higher ratio but this is not universal
E.g. Taiwan very high ratio Germany and Japan lower ratios May reflect differences in equity cultures to be discussed later in the course
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Mkt Cap/GDP
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This fact alone, the growth in the (direct and indirect) investing population, would be reason to study the structure and operation of SEs A growing percentage of the accumulated wealth of individuals and institutions (these are often proxies for individuals) is now in the form of equity assets
Current well being and future life style Driving continued equitization and benefiting from this process However, holding wealth in the form of equities is still available to only half (or often less) of the population in most counties
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1990
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1998
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Equitization
Terms
Stock Market Capitalization Value of trading IPO Turnover Ratio Direct vs indirect stock ownership Wealth and Net Wealth Other basic concepts appear on the following slides please be familiar with them
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