Equity Market Lecture Outline PDF

EQUITY MARKET Official (Closed) and Non-Sensitive Lecture Outline 1. Stock Exchange 2. Primary Market: Initial Public Offering 3. Secondary Market: Shares Trading Official (Closed) and Non-Sens...

EQUITY MARKET Official (Closed) and Non-Sensitive Lecture Outline 1. Stock Exchange 2. Primary Market: Initial Public Offering 3. Secondary Market: Shares Trading Official (Closed) and Non-Sensitive The Stock Exchange A stock exchange is a financial market for trading of company stocks & derivatives at an agreed price Company traded on stock exchange is referred as “Listed” Buying and selling of securities not listed on stock exchange → “Over-The- Counter” (OTC) trade Stock Exchange act as Clearing House for transaction Collect and deliver shares Guarantee payment to seller Buyers & sellers trade during specific hours on business days Participants – individuals, companies/institutions, hedge fund traders etc. Official (Closed) and Non-Sensitive The Stock Exchange Principal functions of a modern and efficient stock exchange in a globalised market are the provision of: markets for a range of financial securities securities trading system clearing and settlement system regulation and monitoring of market integrity well-informed market Official (Closed) and Non-Sensitive The Stock Exchange Factors encouraging investment in securities quoted on a stock exchange Breadth of the market Overall number and variety of securities listed → Larger breadth give investors more investing options in relation to return, risk, liquidity and cash flows of securities Depth of the market Overall capitalisation (number of shares issued multiplied by share price) of corporations listed → Deepening depth indicates growth of securities Liquidity of the market Volume of trading relative to the size of the market → Higher liquidity means investors can buy and sell shares at (or close to) current market price Efficient price discovery Speed and efficiency with which new information is reflected in the current share price → How quickly information gets to the market, and how efficiently information is absorbed by the market participants and reflected in the current price of a share Official (Closed) and Non-Sensitive The Stock Exchange Roles of a stock exchange: Primary market role Secondary market role Trading and settlement roles Information role Regulatory role Official (Closed) and Non-Sensitive Primary Market Role A stock exchange facilitates the efficient and orderly sale of new financial securities New floats/Initial public offerings (IPOs) Initial listing of a corporation on the stock exchange Placements Issue of new shares to selected institutional investors Official (Closed) and Non-Sensitive Secondary Market Role The stock exchange facilitates 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 (monetary value of volume of shares traded) to market capitalization (total value of a company's outstanding shares) Official (Closed) and Non-Sensitive Trading and Settlement Roles Integrated computer-based trading system to trade all listed securities Clients’ orders are executed via computer from the broker’s office Orders are executed in order of time received and the buy/sell price Electronic clearing house Facilitates the settlement of transactions conducted Settlement of transactions within two days (T + 2) Provides an electronic sub-register that records the ownership of listed securities A clearing member is a market participant with access to clearing house system, e.g. stockbroker, bank Official (Closed) and Non-Sensitive Information Role Investor confidence in the stock exchange relies on informational efficiency The current share prices should reflect all information available in the market, determined by: the speed at which new information flows to the market the speed at which that information is absorbed and reflected in share prices The stock exchange has a critical role in facilitating the flow of information to the market Listing rules are stock exchange rules with which a listed entity must comply Examples of information disclosures required by listing rules Declaration of a dividend Notice of a takeover bid Disclosure of directors’ interests Official (Closed) and Non-Sensitive Regulatory Role The aim of regulation is to ensure market participants have confidence in the integrity of market operations Two main supervisors in Singapore Monetary Authority of Singapore (MAS) Singapore Stock Exchange (SGX) Regulation: Ensures listed companies meet specified limited levels of performance and standards of information disclosure so investors can make informed decisions Continuous disclosure Prescribes appropriate behaviour of broker participants on the exchange Sanctions include discipline, penalties, loss of licence Electronic surveillance systems to monitor trading behaviour of market participants Detect trades that fall outside certain limits Official (Closed) and Non-Sensitive Lecture Outline 1. Stock Exchange 2. Primary Market: Initial Public Offering 3. Secondary Market: Shares Trading Official (Closed) and Non-Sensitive Initial Public Offering Initial public offering (IPO) is an offer to investors of ordinary shares in a newly listed company on a stock exchange New share issuer must meet SGX listing requirements Company appoints advisers (e.g. stockbroker, investment bank, other specialists) to provide the following services: Equity raising advisory: Assist with advice on the structure, price, timing and marketing of the issue and allocation of securities. Preparation of IPO Prospectus: Document prepared by an advisor for the company stating the terms and conditions of an issue of securities to the public Underwriting: Ensure a company raises the full amount of the issue. This is done through assuming the risk of an IPO issue by guaranteeing a specific number of shares that will be sold at a pre-determined initial price and purchasing of any surplus shares that are not subscribed at IPO. 13 Official (Closed) and Non-Sensitive Listing a Business on a Stock Exchange A company seeking to have its securities quoted on a stock exchange (i.e. to join the official list) must comply with listing rules A non-complying listed company can be suspended from quotation or delisted Listing rule principles embrace the interests of listed entities, maintain investor protection, and maintain the reputation and integrity of the market 14 Official (Closed) and Non-Sensitive Ordinary Shares Investors of ordinary shares in an IPO Subscribes for shares at stated price listed in IPO prospectus Major source of equity funding Ordinary shareholders have voting rights at general meetings Shareholders’ liability is limited to the price of fully paid shares Investors buy shares to receive returns from dividends and capital gains (losses) 15 Official (Closed) and Non-Sensitive Lecture Outline 1. Stock Exchange 2. Primary Market: Initial Public Offering 3. Secondary Market: Shares Trading Official (Closed) and Non-Sensitive Buying and Selling Shares Direct investment in shares Investor buys and sells shares through a stockbroker Discount broker, i.e. phone and Internet Full-service advisory broker Consideration of liquidity, risk, return, charges, taxation, etc. Indirect investment in shares Investor purchases units in a unit trust or managed fund, e.g. equity trusts 17 Official (Closed) and Non-Sensitive Singapore Exchange (SGX) Trading System Business hours: Mondays to Fridays, 9-5 pm (Mid-day break: 12-1pm) Standard board lot size: 100 units Bids and offers are matched instantaneously Settlement: T+2, i.e. 2 days after the date of transaction Central Depositary (CDP) acts as clearing house Seller’s & buyer’s CDP account (a/c) are credited & debited on due date 18 Official (Closed) and Non-Sensitive How to Trade in Shares Need to open the following accounts: Trading a/c with member firm Central Depository (CDP) a/c CPF Investment a/c – to use CPF funds 18 years & above to open trading account 19 Official (Closed) and Non-Sensitive Brokerage Fees/Commissions Brokerage rate depends on Transaction size Whether transaction was done: Order placed on the phone with broker advice Order placed through phone without broker advice Done online /internet trading 20 Official (Closed) and Non-Sensitive 21 Official (Closed) and Non-Sensitive Trading Fees and Charges Brokerage Commission (e.g., 0.05% to 0.28% or fixed fee) CDP Clearing Fee 0.0325% of value of contract SGX Trading Fee 0.0075% SGX Settlement Fee $0.35 Goods & Services Tax (GST) : Prevailing GST rate; Levied on brokerage, clearing, trading and settlement fees only Not on transaction value 22 Official (Closed) and Non-Sensitive Trading Fees Example You sell 5000 shares of SingTel at $2.43/share online. Calculate the net proceeds due to you. i. Value of Shares: $ 12,150 ii. Brokerage Commission: 0.28 /100 x 12,150 $ 34.02 (Amt $34.02 > min charge of $25 ) iii. CDP Clearing Fees: 0.0325/100 x 12,150 $ 3.95 iv. SGX Trading Fee: 0.0075/100 x 12150 $ 0.91 v. SGX Settlement Fee: $ 0.35 vi. GST on (ii), (iii), (iv), (v): 0.09 x 39.23 $ 3.53 vii. Total Commission & Fees (incl GST) $ 42.76 Net Sales Proceeds ( i – vii ): $ 12,107.24 23 Official (Closed) and Non-Sensitive Going Long vs. Going Short “Going Long” on security: Buy stocks in anticipation of prices increase Buy low, sell high “Going Short” on security/ Short Sell: Sell shares that he does not own As he expects the share price to fall, he hopes to buy back these shares at a lower price, making a profit e.g. short sell 1,000 shares @$5 & buys back @$4, Profit = $1,000 Sell high, buy low 24 Official (Closed) and Non-Sensitive Securities Lending Programme  Securities Lending & Borrowing Facility  Facilitates short selling of shares. Investor can borrow shares that he has short sold.  From 2 December 2019, the borrowing rates for index stocks, REITs and business trusts will be at 0.5% and the rest of securities at 4%. These rates will be reviewed on a periodic basis, taking into account factors such as market rates and demand and supply of the eligible securities.  Lenders’ fees will be calculated based on 70% of the borrowing fee.  No minimum borrowing value.  Low minimum borrowing period of two days.  CDP account holders can register for the programme for free and have the opportunity to earn additional income from their securities holdings.  Securities Borrowing and Lending (SBL) Pool: https://www1.cdp.sgx.com/sgx-cdp-web/lendingpool/show 25 Official (Closed) and Non-Sensitive Major Types of Orders Market Orders Order is entered with a specified quantity but without a price Buy or sell at the best current price available in market Provides immediate liquidity Limit Orders Order is entered with specified quantity and price Order specifies the buy or sell price Time specifications for order may vary 26 Official (Closed) and Non-Sensitive Major Types of Orders Stop Orders Stop Loss Order A conditional market order to sell stock if it drops to a given price Does not guarantee price you will get upon sale Stop Buy Order A conditional market order to buy stock if it increases to a specified price Investor who sold short may want to limit loss if stock increases in price 36 Official (Closed) and Non-Sensitive Summary The stock exchange has a number of market roles Primary and secondary Trading and settlement Information Regulatory Admission to the SGX broadens financing opportunities for the firm and is achieved by satisfying listing requirements Buying and selling of shares can be done through direct investment or indirect investment via units in a unit trust or managed fund. 28