SECURITIES MARKET.pptx

SECURITIES MARKET a) Types of security market b) IPO and Underpricing c) Globalization d) Basic Security Transaction i. Long Purchase ii. Margin Trading iii. Short Selling ©DrAF2023...

SECURITIES MARKET a) Types of security market b) IPO and Underpricing c) Globalization d) Basic Security Transaction i. Long Purchase ii. Margin Trading iii. Short Selling ©DrAF2023 1 A. Types of Markets  Money Markets: the market where short- term securities are bought and sold  Capital Market: the market where long- term securities such as stocks and bonds are bought and sold; classified as primary or secondary.  Primary Market: the market in which new issues of securities are sold to the public  Secondary Market: the market in which securities are traded after they have been issued; aftermarket, seasoned market 2 ©DrAF2023  Primary Markets  Choices to Market Securities in Primary Market  Initial Public offering (IPO):  New firm offering new shares to new owner in order to raise capital  Nationsgate Holding Berhad is offering their new shares to potential investors. IPO Price RM0.38. Date of listing January 12th, 2023.  Rights offering  Existing firm offering new shares to existing owner.  Industronic Bhd.(already listed) is offering a 2-to-1 rights issuance to their existing shareholder on January 22nd , 2023.  Private Placement  New/Existing firm offering new shares to specific owner  BIMB Holding offered private placement to Tabung Haji and EPF in March 2021  Direct listing  Private company transfers some existing shares directly to a stock exchange.  No new raising capital.  No dilution of ownership  Spotify used Direct Listing in April 2018 Primary Market: The IPO Process Obtain the Hire auditors and Appoint approval from all lawyers to certify investment bank existing owner financial disclosure as underwriter Submit While waiting for Once SC approved preliminary SC to approve the prospectus, prospectus (red prospectus, the there will be a herring) for SC firm can promote quite period. approval their IPO Issue final prospectus with IPO application Get listed IPO price, size and period date Cover of a Preliminary Prospectus for a Stock Issue (Dropbox) Primary Market: The Investment Banker’s RoleInvestment Banker: assisting companies in issuing new securities and advising firms  regarding major financial transactions including IPO.  For normal IPOs, their main role is underwriting.  Underwriting: purchases the security at agreed-upon price and bears risk of selling it to the public.  For IPOs with large security issues, forms an underwriting syndicate.  Underwriting Syndicate: group formed to share the financial risk of underwriting.  Selling group: other brokerage firms that help the underwriting syndicate sell the issue to the public.  Compensation typically in the form of a discount on the sale price of the securities.  Setting the IPO price behind the scene: i. Dropbox’s price to Lead Underwriter is USD20 ii. Lead Underwriter to Underwriting Syndicate is USD20.50 iii. U/writing Syndicate to Selling Group is USD20.70 The Selling Process for a Large Security Issue Secondary Markets  Secondary Market: the market in which securities are traded after they have been issued (after market) Role of Secondary Markets  Provides liquidity to security purchasers  Provides continuous pricing mechanism  Securities Exchanges: forums where buyers and sellers of securities are brought together to execute trades  Bursa Malaysia (http://www.bursamalaysia.com/market/)  Bid price: the highest price offered to purchase a given security  Ask price: the lowest price offered to sell a given security  Bid/Ask Spread = Ask Price – Bid Price When you're running a public company, you're held accountable to a multitude of stakeholders all of whom require explanation for your performance.” Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymout This Photo by Unknown Author is licensed under CC BY B. IPO UNDERPRICING U.S. Annual IPO Look at the average Data, 2002–2017 first-day return Average First-Day Aggregate Gross Aggregate Money Left on Year Number of IPOs Return Proceeds (billions) the Table (billions) 2002 66 9.1% $22.0 $ 1.1 2003 63 11.7% $ 9.5 $ 1.0 2004 173 12.3% $31.2 $ 3.9 2005 159 10.3% $28.2 $ 2.6 2006 157 12.1% $30.5 $ 4.0 2007 159 14.0% $35.7 $ 5.0 2008 21 6.4% $22.8 $ 5.7 2009 41 9.8% $13.2 $ 1.5 2010 91 9.4% $29.8 $ 1.8 2011 81 13.3% $27.0 $ 3.2 2012 93 17.9% $31.1 $ 2.8 2013 157 21.1% $38.8 $ 8.6 2014 206 15.5% $42.2 $ 5.4 2015 115 18.7% $21.7 $ 4.1 2016 74 14.6% $12.1 $ 1.8 2017 108 12.9% $24.5 $ 3.7  Malaysian IPO B. IPO UNDERPRICING performance in 2023 Stock IPO Price Closing price on % of the first day of underpricing listing L& P Global Berhad RM0.300 RM0.545 81.67% DS Sigma Holding Berhad RM0.550 RM0.810 47.28% Nationgate Holding Berhad RM0.380 RM1.000 163.16% Wellspire Holdings Berhad RM0.230 RM0.400 73.90% Kumpulan Kitacon Berhad RM0.680 RM0.710 4.41% TT Vision Holdings Berhad RM0.340 RM1.280 276.47% Vestland Berhad RM0.330 RMO.339 18.81% B. IPO UNDERPRICING  Past studies indicate that IPO are underpriced on average  Underpriced means the IPO were sell at too low a price.  Why IPO underpricing?  To ensure full subscription (underwriter’s strategy)  Fail to anticipate investor demand (underwriter’s mistake)  Information asymmetric (the issue with informed investors)  Money left on the table refers to opportunity cost of not taking the chance to maximize the IPO price.  Formula:  IPO underpricing = (Market Price-Offer Price) / Offer Price  Gross Proceed = Offer Price X No. of IPO sold  Money left on the table = (Market Price –Offer Price) X No. of IPO sold B. IPO UNDERPRICING-EXAMPLE  On April 12, 2017, Yext Inc. completed its IPO on the NYSE. Yext sold 10,500,00 shares on stock at an offer price of $11 per share. Yext’s closing stock price on the first day of trading was $13.41. a) Calculate the gross proceeds for Yext’s Inc. IPO b) Calculate Yext’s IPO underpricing c) Calculate the money left on the table for Yext’s IPO.  Solution: a) IPO gross proceeds: $11 × 10,500,000 = $115,500,000. b) IPO underpricing: ($13.41 – $11)/$11 = 0.2191 or 21.91%. c) Money left on table: ($13.41 – $11) X 10,500,000 $2.41 x 10,500,000 = $25,305,000. B. IPO UNDERPRICING A Brazilian company called Netshoes completed its IPO on April 12, 2017 and listed on NYSE. Netshoes sold 8,250,000 shares of stock to primary market investors at an IPO offer price of $18. In its first day of listing, Netshoes closed at $20. On the same day, another IPO was completed by a Mexican company named Chico. Chico was initially price at $10 and offer 6,000,000 shares for investors. However, unlike Netshoes, Chico’s stock price closed lower at the end of first day trading at $8.50. a) Calculate gross proceeds for both IPO. b) Calculate the underpricing (overpricing) for both IPO. c) Explain the situation face by the two IPOs. d) How much money was left on table in the two IPOs. EXERCISE C. GLOBALIZATION OF SECURITIES MARKETS  Diversification: the inclusion of a number of different investment vehicles in a portfolio to increase returns or reduce risks  Advantages of investing globally:  More industries and securities available- diversification  Securities denominated in different currencies  Opportunities in rapidly expanding economies  Easier with the advancement of technology  Top four securities markets (based on dollar volume) worldwide:  NYSE  Nasdaq  London Stock Exchange  Tokyo Stock Exchange  C. GLOBALIZATION OF SECURITIES MARKETS  Indirect Ways to Invest in Foreign Securities  Purchase shares of local.-based multinational with substantial foreign operations Abu purchased stock of XYZ Bhd., Malaysian plantation company where 60% of their plantation is located in Kalimantan, Indonesia.  Direct Ways to Invest in Foreign Securities a) Purchase securities on foreign stock exchanges i. Using local Investment Bank which allows operation in foreign country. Example Maybank Invest, Kenanga Bhd. ii. Using foreign Investment Bank. Open CDS account with Merrill Lynch to enable investment in NYSE. b) Buy securities of foreign companies that trade on local stock exchanges i. For instance, stock of Manchester United (UK) is traded on NYSE (US) c) In US, they also have American Depositary Receipts (ADRs): dollar denominated receipts for stocks of foreign companies held in vaults of banks i. Stocks from non-US company, traded on NYSE using USD denominated ii. Example, Mitsubishi and Fujitsu C. GLOBALIZATION OF SECURITIES MARKETS Risks of International Investing: a) Usual Investment Risks Still Apply b) Government Policies Risks i. Unstable foreign governments ii. Different laws in trade, labor or taxation iii. Different economic and political conditions iv. Less stringent regulation of foreign securities markets c) Currency Exchange Rate Risks i. Value of foreign currency fluctuates compared to local dollar ii. Value of foreign investments can go up and down with exchange rate fluctuations “Stock market doesn't only teach to make money, but it also teaches lot about life, patience, persistence and wisdom.” ― Raj Mishra Philanthropies, Founder of Indea Capital This Photo by Unknown Author is licensed under CC BY-ND D. BASIC TYPES OF SECURITIES TRANSACTIONS Basic Stock Transaction Both can be done with the help of Long financing Short Selling Purchase (margin) Anticipate Anticipate price to price to drop increase Buy low Sell high now, sell now, buy high later low later D. BASIC TYPES OF SECURITIES TRANSACTIONS Buy and hold LONG Buy low, sells high PURCHASE Get profit when price increase Returns: dividend and capital gain Use funds borrowed from brokerage firms MARGIN to make securities purchases TRADING Can be combine with LP or SS Investor sells securities they don’t own Investor borrows securities from broker SHORT SELLING Sell high and buy low Investors make money when stock prices go down D. BASIC TYPES OF SECURITIES TRANSACTIONS LONG PURCHASE Example: Suppose your company’s stock is currently at $50 per share. Ignoring brokerage fees and commission, calculate the gain or loss that will be realized in the following situation: a) A long position is taken and the stock is sold at $65. Sell Price – Purchase Price = (65-50) = $15. Profit b) A long position is taken and the stock sold at $40 Sell Price – Purchase Price = (40-50) = -$10. Loss D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING TERMS DEFINITION Margin account established to execute a margin transaction Initial margin minimum amount of equity that must be provided by the investor for start up Maintenance minimum amount of margin (equity) that an investor margin must maintain in the margin account at all times Debit balance amount of money being borrowed in the margin loan Equity the cash deposited in the margin account Margin call Investor receives this when an insufficient amount of maintenance margin exists and then has a short period of time (few hours to few days) to bring equity up above the maintenance margin. D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING EQUITY (CASH DEPOSITED ) VALU DEBIT E BALANCE (AMOUNT NORROWE D)  D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING  Advantages  Allows use of financial leverage  Magnifies profits  Disadvantages  Magnifies losses  Interest expense on margin loan  Margin calls D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN REMEMBER!!! TRADING 80% MARGIN: 80% EQUITY + 20% DB 65% MARGIN: 65% EQUITY + 35% DB 50% MARGIN: 50% EQUITY + 50% DB NO MARGIN: 100% EQUITY + 0% DB 20% MARGIN  D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING  Basic Margin Formula  Return on Invested Capital  D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING Example 1 Wolfgang buys 250 shares of Volkswagen stock at $37.5 per share, putting up a 45% margin. a) What is the value of the position? Value = Price x Unit = $37.5 X 250 = $9375 b) What is the debit balance of the transaction DB = Value x (1-margin%) = $9375 x (1-0.45) = $5156.25 c) How much equity must Wolfgang provide in the transaction? E = V-DB = $9375-$5156.25 = $4218.75 OR E = Value x (margin %) = $9375 x 0.45 = $4218.75  D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING  Example 2 Barbara purchased 100 shares of HD stock for $187 per share, using as little money of her own as he could. Her broker has a 55% initial margin requirement and a 45% maintenance margin requirement. If the price of HD stocks falls to $142 per share, what will happen? Original value = $187 x 100 = $18700 FORMULA 1: Equity value at margin Equity = $18700 x 0.55 = $10285 requirement-(Total Value at Margin requirement DB = $18700 - $10285 = $8415 level – Debit Balance) After the price drop: New value = $142 x 100 = $14200 while DB remain the same New margin = (V-DB)/V = (14200-8415)/14200 = 40.74%; lesser than maintenance margin requirement. Need to have a margin call! To be able to get 45% margin, Barbara must have Equity of: $14200 x 0.45 = $6390 Margin call will be $6390 – ($14200 - $8415) = $605  D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING FORMULA 2: Equity value at margin requirement- Equity Value from current position Example Value Value Value 18700 14200 14200 Equity Debit Equity Debit Equity Debit 10285 8415 5785 8415 6390 7810 55% 45% 40.74% 59.26% 45% 55%  Original margin was 55%  After the price drop, margin is  To achieve 45% margin, add now 40.74%. It is lower than more cash to ensure equity is the margin requirement so 45% (margin requirement). additional cash (equity) will be deposited  Margin call= 6390-5785 = 605  D. BASIC TYPES OF SECURITIES TRANSACTIONS MARGIN TRADING 1. Amy bought 100 shares of stock at $70 per share using an initial margin of 50%. Given maintenance margin of 30%, how far does the stock have to drop before Amy faces a margin call? 2. Assume that an investor buys 100 shares of stock at $50 per share , putting up a 75% margin. a) What is the value, debit balance and equity in the transaction? b) If the stock rises to $55, what will be the new margin position? c) If the stock drops to $45, what will be the new margin position? If the maintenance margin of the broker is 50%, would there be a margin call? EXERCISE  D. Basic Types of Securities Transactions Short Selling Monday: Ali Monday: Ali sells anticipate that Monday: Ali 100 unit of Nestlé's Nestle stock price borrows 100 unit of stock at a price of will decline on Nestlé's stock from RM50 per unit. Thursday his broker Profit : RM500 Thursday: Ali buys Ali returns the 100 100 unit of Nestle Thursday: The units stocks back to at a price of RM30 current price is his broker RM30 Cost: RM300 D. Basic Types of Securities Transactions Short Selling Advantages: Disadvantag 1.Chance to es: profit when 1.Limited stocks return decline 2. Unlimited risk  D. Basic Types of Securities Transactions Short Selling  Example 1 Calculate the profit/loss per share realized on each of the followings: Transacti Stock Sold Stock Profit/Loss on Short Purchased at to Cover Short Price/share at Price/Share A $93 $78 Proceed- Cost = 93-78 = $15 Profit B $13 $27 Proceed- Cost = 13-27 = -$14 Loss C $98 $75 Proceed- Cost = 98-75 = $23 Profit D $62 $44 Proceed- Cost = 62-44 = -$18 Loss D. Basic Types of Securities Transactions Items Initial short Subsequent Short Selling sales price Price A Price per share $69 $82  Example 2 B Proceeds (69 x75 units) $5175 An investor short sells 75 shares of stock for $69 per share. The C Initial margin deposit (B X 0.6) $3105 initial margin is 60% and the maintenance margin is 40%. The D Total deposit with broker (B + C) $8280 $8280 price of the stock rises to $82 per share. What is the new E Cost of buying back stocks (82 x $6150 margin and will there be a 75) margin call? F Account equity (D-E) $2130 G Actual margin (F/E) 34% H Maintenance margin is