Transcript
- 1. Chapter 4
- The Share Market
- and the Corporation
- Websites:
- www.asic.gov.au
- www.asx.com.au
- www.nyse.com
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 2. Learning Objectives
- Understand the nature of corporations and reasons for public listing
- Discuss the role of primary and secondary markets in equity financing
- Explain the derivatives and interest rate roles of a stock exchange
- Understand the electronic trading and settlement systems for share market transactions
- Explain the importance of information flows for share market efficiency
- Identify the main regulators of the share market
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 3. Chapter Organisation
- 4.1The Nature of a Corporation
- 4.2The Stock Exchange
- 4.3Summary
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 4. 4.1 The Nature of aCorporation
- Share market
- A formal exchange facilitating the issue, buying and selling of equity securities
- Publicly listed corporation
- A company whose shares are quoted and traded on a formal stock exchange (SX)
- Ordinary share
- The principal form of equity issued by a corporation, which bestows a claim to residual cash flows and ownership and voting rights
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 5. 4.1 The Nature of aCorporation (cont.)
- The corporation differs from other business forms
- Ownership claims are widespread and easily transferable
- Owners (shareholders) do not affect the day-to-day affairs of the company
- Shareholders liability is limited to
- T heissue price of shares of a limited liability company
- Any partly paid portion of shares of a no-liability company
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 6. 4.1 The Nature of aCorporation (cont.)
- Advantages ofthecorporate form
- Can obtain large amounts of finance for a relatively cheap cost
- The liquidity of securities facilitates investor diversification and encourages investment in corporate securities
- Separation of ownership and control facilitates
- Appointment of s pecialised management
- Greater effectiveness in the planning and implementation of strategic decisions
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 7. 4.1 The Nature of aCorporation (cont.)
- Advantages ofthecorporate form(cont.)
- Perpetual successionthe corporate form is unaffected by changes in management or ownership
- The corporate form is suited to large-scale operations
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 8. 4.1 The Nature of aCorporation (cont.)
- Disadvantages of the corporate form
- Maindisadvantage arises due to the separation of ownership and control
- Conflict of interest between owners (principals) and managers (agents) known as the agency problem
- Management maytry to run business for their own benefit, rather than that of shareholders, i.e. maximise shareholder value (share price)
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 9. 4.1 The Nature of aCorporation (cont.)
- Disadvantages of the corporate form (cont.)
- Factors moderating conflict of interest between owners and managers
- Investors ability to sell shares in a corporation, causing the share price to fall
- Dismissal from the board at AGM by shareholders
- Threat of takeover and loss of employment
- Use of performance incentives, such as share options
- More rigorous corporate governance
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 10. Chapter Organisation
- 4.1 The Nature of a Corporation
- 4.2 The Stock Exchange
- 4.3 Summary
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 11. 4.2 The Stock Exchange (SX)
- Primary market role
- Secondary market role
- Derivative market role
- Interest rate market role
- Trading and settlement roles
- Information role
- Regulatory role
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 12. Primary market role
- The SX f acilitates the efficient and orderly sale of newfinancial securities
- New floats/initial public offerings (IPOs)
- Initial listing of a corporation on the SX
- Rights issue
- Issue of additional shares to existing shareholders on a pro-rata basis
- Placements
- Issue of new shares to selected institutional investors
- Dividend reinvestment plans
- Reinvestment of dividends into corporation for additional shares
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 13. Primary market role (cont.) Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 14. Primary market role (cont.) Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 15. Secondary market role
- The SX f acilitates trading in existing shares
- No new funds are raised by the issuing company
- An active, liquid, well-organised secondary market increases the appeal of buying new shares in the primary market
- Market liquidity
- Ratio of share turnover to market capitalisation
- Market turnover
- Number of shares on issue x current share price
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 16. Secondary market role (cont.) Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 17. Derivative market role
- TheSX provide s a m arket for tradingequity -related derivative products
- A derivative is a financial security that derives its price from an underlying commodity (e.g. gold) or financial instrument (e.g. Fosters shares)
- Derivative products are described as
- Exchange-traded contracts
- Standardised financial contracts traded on a formal exchange
- Over-the-counter contracts
- Non-standardised contracts negotiated between writer and buyer
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 18. Derivative market role (cont.)
- TheSX provide s a m arket for tradingequity -related derivative products (cont.)
- Derivatives serve asa
- R isk management tool(hedge)
- S peculative instrument
- Derivatives traded onaSX include
- Options
- Warrants
- Futures contracts
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 19. Interest rate market role
- The listing, quotation and trading of typically longer-term debt instruments on a SX
- Straight corporate bonds
- Floating rate notes (FRNs)
- Convertible notes
- Preference shares
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 20. Interest rate market role (cont.)
- This role adds value to a debt issue due to
- Transparency
- Information about price, yield, maturity, credit rating of debt instruments
- Ease of entry
- Electronic trading system facilitates buy and sell orders at minimum cost and time delay at current market prices
- Liquidity
- Quotation on a SX provides access to a wider market
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 21. Trading and settlement roles
- The ASX uses CLICK XT, an integrated computer-based trading system to trade all listed securities
- Clients orders are executed via computer from the brokers office
- Orders are executed in orderof timerecei ved and the buy/sell price
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 22. Trading and settlement roles (cont.)
- The ASX usesCHESS (Clearing House Electronic Sub - register System)
- Facilitates the settlement of transactions conducted through CLICK XT
- S ettlementof t ransactions within 3 days(T + 3)
- Provides an electronic sub-register that records the ownership of listed securities
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 23. Trading and settlement roles (cont.)
- CDI( CHESS Depositary Interest)
- Electronic depositary receipts issued by the ASX representing uncertificated (scriptless) securities
- CUFS (CHESS Unit Foreign Securities) for equity securities
- DI (Depositary Interest) for debt and bearer securities
- Overcomes problems of countries not recognisinguncertificatedholdings or the electronic transfer of legal title
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 24. Information role
- Investor confidence in the Australian Stock Exchange (ASX) relies on informational efficiency
- The current share prices should reflect all information available in the market
- The ASX has a critical role in facilitating the flow of information to the market
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 25. Information role (cont.)
- Listing rules are SX rules with which a listed entity must comply
- Examples of information disclosures required by ASX listing rules
- A change in a companys financial forecasts
- Appointment of a liquidator
- Declaration of a dividend
- Notice of a takeover bid
- Disclosure of directors interests
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 26. Regulatory role
- The aim of r egulationis to ensure market participants have confidence in the integrity of market operations
- Two main supervisors in Australia
- Australian Stock Exchange ( ASX )
- Australian Securities and Investment Commission( ASIC )
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 27. Regulatory role (cont.)
- ASX
- Ensures listed companies meet specified limited levels of performance and standards of information disclosureso investors can make informed decisions
- Continuous disclosure
- Prescribes appropriate behaviour of broker participants on the exchange
- Sanctions include discipline, penalties, loss of licence
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 28. Regulatory role (cont.)
- ASX(cont.)
- Electronic surveillance systems to monitor trading behaviour of market participants
- Detect tradesthat fall outside certain limits
- C ross-references all trades against information on the relevant company, directors and associated parties
- The National Guarantee Fund (NFG) compensates investors in the event of failure or misconduct by a stockbroker
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 29. Regulatory role (cont.)
- ASIC
- Responsible for the supervision of Corporations Law and markets in Australia ( Corporations Act 2001(Cwlth))
- Responsible for market integrity and consumer protection across the financial system , covering investment, insurance and superannuation products
- Supervises the ASX, addressing the potential conflict of interests as a publicly listed corporation
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 30. Chapter Organisation
- 4.1 The Nature of a Corporation
- 4.2 The Stock Exchange
- 4.3Summary
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4- 31. 4.3 Summary
- Corporate form of organisation has advantages (fundraising and management) and disadvantage of separation of ownership and control
- The SX has a number of market roles
- Primary and secondary
- Derivative
- Interest rate
- Trading and settlement
- Information
- Regulatory
- ASX monitors market participants and ASIC supervises Corporations Law and market integrity
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths Financial Institutions, Instruments and Markets 5eby Viney Slides prepared by Anthony Stanger 4-
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