International Monetary Systems. Equity Markets

International Monetary Systems Equity Markets Domestic and International Equity Markets Before the 1990s, almost every firm listed its shares exclusively on a domestic stock exchange. Investors, such as pension funds and insurance companies, tended to invest domestically. However, since the 1990s, companies and investors have taken advantage of new opportunities to list abroad and to diversify their portfolios internationally. Today, foreign companies account for 18% of companies listed on the London Stock Exchange (LSE), and foreign investors hold more than 55% of all UK shares. London Stock Exchange:    1, 998 companies listed with a market capitalisation of £3.6 trillion. In 2021, they raised £49.2 billion in capital. In 2021, the LSE was the number 1 exchange in Europe, raising more equity capital than the Amsterdam and Paris exchanges combined, and the most equity capital raised outside the US and Greater China. World Stock Exchange:    51,000 listed companies globally with a market capitalisation of USD 124 trillion. The capital raised by newly listed and already listed companies in 2021 amounted to USD 1,300 billion. The three exchanges with the highest market capitalisation were: New York, Nasdaq, and Shanghai. Stock Exchanges – Primary and Secondary markets    Place for companies to list and to raise new capital. Issuance of new shares. Primary market. Place for shares to be traded among investors Trading of existing shares. Secondary market. Provide a primary and secondary market for shares Stock Exchanges – Main & SME/ Alternative markets    Most exchanges consist of a main market and an SME market. The Main Market is often reserved for more established and larger businesses. It has more stringent admission criteria and more demanding ongoing obligations. 1,146 companies are listed on LSE’s Main Market. The SME or Alternative Market is designed for younger and smaller companies. It is easier to become (and remain) listed. 852 companies are currently listed on LSE’s AIM Market. Why list on a stock exchange? 1. The primary goal of listing on a (foreign) stock exchange is to raise capital. 2. Listing on a (foreign) stock exchange allows the company’s original investors e.g., founder(s), venture capital investors, etc., to (partially/fully) exit the company and cash in on their investments. 3. Firms also list their stock on (foreign) stock markets to facilitate future acquisitions of (foreign) companies. 4. Another reason for listing is that the company’s share and share options can be used to compensate or incentivise local management and employees. 5. The status and visibility of a company can be enhanced by being listed on a major stock exchange. Listing can have a positive impact on the image of the firm in the eyes of customers, suppliers and other stakeholders. Pros & Cons of listing on the Stock Exchange Market Issuing shares: ‘new issues’ and ‘rights issues’    New Issue: During an initial public offering (IPO), the company issues new shares to the public for the first time. Rights Issue (offering): is a way for a listed company to raise additional capital from its shareholders. Shares are usually offered to existing shareholders in proportion to their holdings and at a discount. The shareholder may take up the rights and pay for the new shares or sell his/her rights to do so to another investor. Investment banks play a key role in IPOs and rights offering. They advise on the amount and price of shares to be issued. The help the company prepare the prospectus with detailed information on the company’s performance and prospects. They also act as underwriters, that is, they commit themselves to buying any unsold shares. Main Financial securities sold on the LSE Shares, ETFs and DRs  Shares represent ownership in a company. Shareholders benefit from shares in 2 ways: dividends (share of company profits distributed to owners) and share price increases.  Ordinary shares: The most common type of share. It gives the owner the right to vote at shareholders’ meetings; and the right to receive dividends. In the event of bankruptcy and liquidation, ordinary shareholders receive any remaining funds after the creditors, bondholders, and preference shareholders are paid. Shares are at the riskiest end of the risk-return spectrum and can therefore give the highest return.  Preference shares: they give the shareholder the right to fixed dividends. However, they do not give shareholders the right to vote. The lesser risk attached to holding preference shares means that the return in good years is less than that of ordinary shares.  Convertible preference shares can be converted into ordinary shares at a certain price.  Exchange-traded funds are funds/companies that invest money raised (by selling shares) into a range of shares to track a particular stock market index.  A stock market index measures the performance of particular segments of the market over time. It is often calculated based on the market capitalisation of the companies included in the index. Most important stock indices in the UK     FTSE 100 Index: It was launched in 1984 and began at the level of 1,000 points. It is the share index of the largest 100 companies listed on the LSE by market capitalisation. FTSE 250 Index: It is made up of the next 250 largest companies listed on the LSE i.e., 101st- 350th largest companies. FTSE Small Cap Index: It is an index of small companies, consisting of the 351st to the 600th largest listed companies on the LSE. FTSE All-Share Index: It is made up of the FTSE 100, FTSE 250 and FTSE Small Cap Indices. Technical vs Fundamental Analysis of Stocks    In the equity markets, some traders use technical analysis (chartism) to decide whether to buy or sell a share. Technical analysis (chartism) involves looking at the past price movements of a stock and using this data to predict future price movements. It uses purely past changes in a share’s price to determine whether to buy or sell a share Fundamental Analysis Fundamental analysis involves the analysis of a company’s financial data to determine whether a stock is under-priced or over-priced. Some basic ratios/indicators. 1. Earnings per share - he earnings net of taxation, interest payments (and dividends on preference shares) divided by the number of outstanding ordinary shares. 2. Earnings yield - the ratio of earnings per share to the share price. 3. Dividends per share - total dividends paid by the company divided by the number of outstanding ordinary shares. 4. Dividend yield - the ratio of a company’s dividend per share to the share price. 5. Price-earnings ratio - the price of a share divided by the earnings per share. 6. Beta - measure of a share’s price volatility relative to the average volatility of the national stock market. A share with a beta of 1 will move in tandem with the market average. The higher the beta the more volatile the stock relative to the market. 7. Return on capital employed - the gross earnings before capital and taxes divided by the total capital of a company (debt + equity). Forms of Market Efficiency    In a strong-form efficient market, security prices fully reflect both public and private information. In a semi-strong-form efficient market, security prices fully reflect public information. In a weak-form efficient market, security prices only reflect past prices and information.