Introduction to the stock market

Introduction to the Stock MarketGUTIC Board

10th October 2013

Content

• Introduction to the Stock Market• Financial News Update • Macroeconomic Analysis • Currency Analysis• Stock Picking of the week.

Introduction to the Stock Market

Yassine Essadiq

Introduction to the Stock Market

• Stocks(American)=Shares(British).• Firms can raise capital in two ways: - Apply for a loan through a retail bank.

- Issue shares through a Stock Market.• Equities (shares) represent an ownership part of a company.

What are Shares?

• Needs buyers and sellers, like every market.• People can purchase shares through brokers ( investment

bank) or online brokers.• Bullish = Buying Sentiment• Bearish = Selling Sentiment• Long = Buy• Short = Sell

Introduction to the Stock MarketWhat are Shares?

Introduction to the Stock Market

• Companies earnings are either: - Reinvested - Paid out to shareholders in form of dividend• Voting rights• Yield ( If share increase in value)• Other specific benefits:• - Airlines – Own 1000 shares get discount etc.

Advantages

Introduction to the Stock Market

• Lack of information => Risky• No dividend: - Microsoft has not paid out dividend in 20 years• Bankruptcy• Recession

Disadvantages

• Law of supply and demand: - High demand: High price. - Low demand: Low price.• Supply side: - How many shares exist? - Are there many sellers? - Is there easy access?• Demand side: - How popular is the company - An idea spreads as it gains popularity.

Introduction to the Stock MarketWhat are Shares?

Introduction to the Stock Market

• Common stock = ownership share in publicly held company• Dividend = Periodic cash distribution from the company to its shareholders• Book value = Net worth of the firm according to its balance sheet• Market Capitalization = Number of outstanding shares X current share

price.• Volatility = amount of uncertainty or risk about the size of changes in a

security’s value• Volume= The number of shares or contracts traded in a security or an

entire market during a given period of time.

Definitions

Introduction to the Stock Market

• Fundamental Analysis: - Long-term - Quantitative: based

- Financial statements - Reports: quarterly/annually

• Technical Analysis: - Short term - Graphs

- Charts - Patterns

Different forms of analysis

• http://uk.finance.yahoo.com/• www.lse.co.uk• www.cmcmarket.co.uk

Introduction to the Stock MarketHow to get Started

• Investing in stocks should give good returns. - Has risks• Supply and Demand drive price - The demand side can be very complicated• Price does not reflect true value - Sentiment affects price but value - Stocks can become over valued

Introduction to the Stock MarketConclusion

Sources

• www.investopedia.com• www.stockopedia.com

Financial News Update

Freddie Sandberg

Major World Indices

• USA– S&P500– DJIA– NASDAQ

• Europe, Middle East, Africa– FTSE 100– STOXX 50 (50 largest european firms based on market

capitalizaiton)• Asia-Pacific– Nikkei 225

America

• S&P500, • NASDAQ, • DJIA

• Government shutdown – Debt ceiling– Poor Economic confidence (as low as 2008)– Slight strength in market (S&P500 + DJIA) from

early signs of debt ceiling negotiations.– New FED chair Janet Yellen brings calm to markets• ”[...] an advocate for aggressive action to stimulate

economic growth through low interest rates and large-scale bond purchases.” -Reuters

Europe

• FTSE100• STOXX50

• Hit one month low on Wednesday – US political deadlock– High risk aversion– ”We recommend sticking with defensive

positioning, looking to become more aggressive again in three to four weeks when some of the uncertainty has been removed.”-Gerhard Schwartz, Baader Bank

– Overall weak western markets, strongly influenced by US government crisis.

Asia-Pacific

• Nikkei 225

• Hit 5 week low on Tuesday• Recovery helped by Janet Yellen selection• China’s economic slowdown – Forecast for GDP growth downgraded from 8.3% -

7.5% by World Bank• Chinese economy bigger concern than U.S

economic and budget failures• Survey showed 44% ranked Chinese economy a

top risk, 23% put USA.

Summary

• General world trend is weak, especially western

• Market gains confidence with new FED chair + possible debt ceiling negotiations and deadlock end.

Sources

• Reuters (uk.reuters.com)• Bloomberg (www.bloomberg.com)• CNN Money (money.cnn.com)

Week 2 and Beyond

US Government Shutdown

• Democrats– Support President Obama and the

Affordable Care Act– Control the Senate

• Republicans– Split by the Tea Party (young, very

conservative group)– Against Obamacare, forced

shutdown – Control the House

• The Fed– The Federal Reserve – US Central banking system– Undergoing change of leadership– Threatening to end bond buying

recovery program

Key players

• Costs about $140 million per day• Millions furloughed or left without benefits/government services• Major US stock market falls

– Investor confidence remains at highest levels (79%) since 2009 according to latest Center for Audit Quality surveys but set to drop

– “If the shutdown were to last one more week, the study indicates, confidence would drop to 60%, a level it hasn’t breached in the seven years in which the survey has been conducted.” (Fontevecchio, 2013)

• Disrupting talks to raise the debt ceiling• On Oct. 17, the US Treasury will have insufficient cash-on-hand• Without a solution, the US will default on its debts

Economic Risks: Domestic

* FONTEVECCHIO, AGSTINO. (n.d.). Retrieved from http://www.forbes.com/sites/afontevecchia/2013/10/09/obama-and-boehners-shutdown-is-destroying-investors-confidence-in-the-market/

• USD is the global reserve currency• A US default could cripple global recovery• USD has fallen to lowest levels in 3

months • If default, investors would likely drop the

dollar• Pressure now on Yen and Yuan, but China

and Japan hold $2.4 trillion in US debts• Global recession triggered could be far

deeper than 2008– Currency volatility already in progress– USD has hit 3 month lows but lacks steam

for bullish rebound– Initial resistance is at 10536, the 23.6%

Fibonacci retracement, with a break above that targeting the 38.2% level at 10591

Economic Risks:International

• Current Vice Chair of the Fed• Transition expected to be smooth• Will likely continue Bernake’s

policies• Considered monetary dove

– Keynesian, focus on full employment

– Will revive NAIRU (Non-Accelerating Inflations Rate of Employment)

• Tapering unlikely to occur in 2013– Government will continue bond

buying

• Gold shares have begun drop in light of news

Positives: Yellen announced

• VIX coming down from highest spike since Dec 2012 but remains at 19.30, 39.90% above its 50-day average– Fear and Greed Index has moved from 20 to 22, which still indicates

a mood of Extreme Fear– Until significant VIX declines, expect sharp/bearish market reactions

• US Stocks, USD will rally as early negotiations to end shutdown and raise debt ceiling begin– However, expect lower confidence and temporary solutions– Volatility will remain, though overall resistance will largely remain

untested– CHF, JPY momentum shifting as USD slowly rebounds

• Gold and other precious metals may remain in bear market

Moving Forward

Glasgow university trading and investment club

Overview of the British Economy

Gross Domestic Product

• Total expenditure for all goods and services produced and consumed within a domestic economy

• Total income of everyone in the domestic economy

GDP Growth Rate

• % change in “seasonally adjusted” GDP quarter, compared to the previous quarter

• Recession – two consecutive quarters with -ve GDP growth

• “IMF raises UK growth forecasts as economy ‘turns corner’” – Larry Elliott, Guardian Economics editor, 8 October 2013

• “Service sector third-quarter growth strongest in 16 years” – Reuters

1. Makes up for more than 75% of UK GDP2. Based on Markit PMI measured 60.3 (50 no change in activity)

Debt/GDP ratio

• % debt Country X has in proportion to its GDP• indicator of an economy’s health

• Why relevant to markets?1. Confidence – risk of Default

• “Britain should not take its credit status for granted” – Kenneth Rogoff, October 2 2013

Interest rate decision

• Cost of borrowing and return on savings

• 0.5% Bank of England Base Rate…“until unemployment < 7%” – Mark Carney

• Markets remain unconvinced!1. Rosy projection (exc. U.S)2. Belief of possible housing bubble3. Improvement in productivity

• “Bank of England’s Mark Carney seeks to win over guidance sceptics” – Claire Jones, Financial Times, 28 August 2013

• “Mark Carney reinforces warning on rising interest rates for home owners” – Philip Inman, Guardian, 2 October 2013

Industrial production

• “UK industrial output for August lowest in a year” –Financial Times, 9 October 2013

• Important for forecasting future GDP and economic performance

• Used also by Central Banks to measure inflation

• Manufacturing, mining and utilities

Summary

• UK growth has been (surprisingly) strong last quarter and looks to continue in Q4, mainly from service sectors

• Although UK GDP still 3% lower than pre-crisis level and therefore interest rates will remain low (economy has yet to hit capacity)

• IP is low, though not a huge determination of GDP• Committed austerity measures speculatively

reduce the deficit (GDP-ratio)

• “Six months ago, the economic debate was about the risk of a triple-dip recession. Today it is about ‘escape velocity’. In six months time, it will be about the risks of overheating.” – Guardian Economics editorial

Materialshttp://www.theguardian.com/business/2013/oct/08/imf-raises-uk-growth-forecasts-economyhttp://uk.reuters.com/article/2013/10/03/uk-poll-service-idUKBRE9920DL20131003http://www.ft.com/cms/s/0/b933e5e8-29ef-11e3-9bc6-00144feab7de.html#axzz2hFIoOStphttp://www.ft.com/cms/s/0/bec5124e-0fd6-11e3-a258-00144feabdc0.html#axzz2hFIoOStphttp://www.theguardian.com/business/2013/oct/02/mark-carney-warning-interest-rateshttp://www.ft.com/cms/s/0/88c95f00-30c0-11e3-b478-00144feab7de.html?ftcamp=published_links%2Frss%2Fhome_uk%2Ffeed%2F%2Fproduct#axzz2hFIoOStphttp://www.theguardian.com/business/economics-blog/2013/oct/03/uk-economic-boom-could-be-boomlet

Stock Picking of the week

• Lloyds Banking Group is a major British financial institution, formed through the acquisition of HBOS by Lloyds TSB in 2009

Stock Picking of the week

• Mon, 7th Oct 2013 14:49• "Investors have been clear that they like Lloyds as a

credit and would be keen to get exposure through a public market transaction” Peter Green, manager of senior issuance at Lloyds.

• "Investors are very keen to buy into Lloyds given the long period of absence in primary and I think the results of this deal are likely to catch the attention of other UK banks.” Peter Green, manager of senior issuance at Lloyds.

Financial News

Stock Picking of the week

Tue, 8th Oct 2013 14:00

• Scheme designed to help homebuyers with small deposits

• Critics worry scheme could fuel new property bubble• Survey shows house prices rising at fastest in 11 years• Lenders to pay commercial fee but will get capital

relief

Financial News

Company Half Year results:• Substantial increase in underlying profit of

£1,858 million to £2,902 million with income growth of 2%

• Return on risk-weighted assets increased from 2.44% to 3.16%

Stock Picking of the weekFinancial News

• Price to earnings ratio: 37.8

- A high P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with a lower P/E ratio.

• Price to earnings ratio 1 year rolling forecast: 11.4

3 x Cheaper than RBS - It is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.

Stock Picking of the weekFundamental analysis

• Price to book value ratio: 1.19 Higher than RBS. - Book value denotes the portion of the company held by the shareholders; in other words, the company's assets less its total liabilities.

Stock Picking of the weekFundamental analysis

Stock Picking of the weekTechnical analysis

Stock Picking of the weekTechnical analysis

• Chart Type: Candle Stick.• Time Frame : 1 month• Overlays: Bollinger Band.• Indicators: - Relative Strength Index. - Bollinger Band Width. - MACD. - Volume.

• Relative Strength Index: A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

- Yesterday the RSI is 41.35, which shows an incentive of overselling the share and hence undervaluing the share price.

Stock Picking of the weekTechnical analysis

• Bollinger Band Width: Shows the volatility of the share. - On the 9th of October we can see that the share has a Bollinger Band width of 4.644, which shows a low volatility of the stock.

• MACD: A trend-following momentum indicator that shows the relationship between two moving averages of prices. When the two lines cross, it means that there is a change in the trend of the share price.

- In the graph, we can see that the lower line is going down and tend to make the space between the lines larger. Hence, the trend does not look to change.

Stock Picking of the weekTechnical analysis

• Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. The higher the volume during that price move the more significant the move.

Stock Picking of the weekTechnical analysis

• New scheme transforms more liquidities into assets.

• Possible property bubble ( recession?)• Investors more likely to go long when their

entry price will reach its entry level and invest in long term.

• Good half year financial results

Stock Picking of the weekConclusion

• http://www.stockopedia.co.uk/valuation/?ticker=LON%3ARBS• http://www.stockopedia.co.uk/share-prices/chart/• http://www.investopedia.com/terms/r/rsi.asp• http://www.lse.co.uk/SharePrice.asp?SharePrice=LLOY&goBut

ton=Go

Stock Picking of the weekReferences