THE SHARE MARKET

THE OBJECTIVES OF THE CHAPTER

Define shares and the share market, and list and discuss

different classes of share Discuss and understand the functioning of the primary and secondary markets List and discuss the different types of share transaction List, discuss and execute basic share market indicator calculations and understand valuation concepts. Understand and interpret published share market information Discuss the determinants of the level of share prices

What is a share
The words shares, equities and stocks are
used interchangeable to mean a financial instrument listed on as stock exchange. Shares are marketable instruments that represents ownership by investors of the productive assets of a listed company.

WHAT IS THE ROLE OF JSE?

JSE provides a formal market in which
shares/stocks are traded. JSE provides a platform for raising of capital by borrowers in the primary market and the secondary and trading of these financial assets in the secondary market by lenders and borrowers.

What is the difference between shares and debt financing.

Risk? Income? Maturity? JSE vs BESA

Central Securities Depository: What is its role?

This is a body that acts as a custodian acting on

behalf of the participants holding shares in the dematerialized environment. Dematerialized environment has eliminated share certificate and replaced it with an electronic scrip register. The body executes transfers of shares between the accounts of the holders through book entries.

Accounting principles
Assets- investor Equity- issuer

Different classes of shares

PREFERENCE SHARES These are share that ranks higher than ordinary shares and
PARTICIPATING PREFERENCE SHARES Shares that grant a holder predetermined dividends in
have a higher priority when it comes to distribution of dividends. They usually carry no voting rights.

CONVERTIBLE PREFERENCE SHARES Preference shares that may be converted to ordinary shares

addition to sharing into the remaining profits. These shares receive a specified dividend at a fixed nominal predetermined rate

according to specified terms and conditions. The conversion can be made compulsorily or it may be voluntary. They carry a fixed predetermined dividend rate.

Different classes of shares continued

REDEEMABLE PREFERENCE SHARES These are shares that grant the issuing company
CUMULATIVE PREFERENCE SHARES If the company does not have funds to pay
an option to redeem the shares at a predetermined price and time.

ORDINARY SHARES Holders of this kind of shares have a right to vote

on company matters and are entitled to share in profits after payment of interest on debt and dividends on preference shares.

dividends, the dividends on the cumulative preference shares accrue until fully paid.

Different classes of shares continued

DEFERRED SHARES These are issued to raise funds for capital
projects which do not yield profit on the outset. Payment of dividends on this type of shares is deferred for either a specified period or after a specified amount of dividends on ordinary shares has been attaint.

BEARER SHARES Shares issued to the bearers of shares, and in the

absence of the share register, the identity of the bearer who is also the owner of the share is not known to the issuing company. Ownership is determined by physical possession of the share certificate.

The Primary and Secondary Share markets Primary Market in the share/equity market

is a market in which new share are traded. Secondary market is a market in which previously issued shares are traded.

SECONDARY MARKET
SECONDARY MARKET

FORMAL MARKET

OVER THE COUNTER

DIRECT TRADES

OFF EXCHANGE

HOW IS THE PRICE OF A SHARE DETERMINED?

The trade-between demand and supply

determines the price of shares. The supply and demand are also subject to expectations and preferences. Market conditions International market conditions Exchange rate Interest rates Economic cycles Confidence/psychological effect

Different types of equity financing

Acquisition of assets Rights issue Sript dividend or capitalization issue Via prospectus

How companies qualifies for listing

For a private company to be listed on JSE
and be given a quotation it has to change to a limited liability public company.

JSE listing requirements

A company has to publish prelisting
statement disclosing full initial information on the affairs of the company. Fulfill all the listing requirements And adhere to the rules and directives of JSE

Types of share transaction on the JSE

Arbitrage transaction
This is a simultaneous purchase or sale of a share and sale or purchase of the same share thereof in a different market. Bear sale Sale of shares not owed by the seller at current market price, in anticipation of buying the shares at a price lower than the selling price.

Types of share transaction on the JSE

Put-thru transaction
This is a transaction concluded by a stockbroker that is a JSE member firm on behalf of its own clients by simultaneously buying and selling the same shares at the same market price to both parties.

Types of share transaction on the JSE

A special Bargain transaction Is a transaction that is beyond the

capacity of the market price. This transaction involves different buying and selling brokers

 Odd-a lot transaction Transaction in shares in quantities other

than rounded hundreds. All-or nothing trades This is a transaction where full order has to be executed immediately other wise the order is routed to a special terms order book

 A fill or kill trade Requires immediate execution of the full

order other wise, other wise the order is cancelled. At best trade

Calculation and valuation concepts

Return on shares= dividends + capital

(gains/losses) Two prices are quoted a bid price and an offer price E.g offer price bid price 100 75 Spread 25 rand or can A matched trade is occurs when two dealer/ brokers have reached an agreement

 Sales price/contract price is the price at

which the deal was struck. Closing price is the last price for a particular trading day. Market-to-market

 Profitability as determinant of share

income Total return/ or realized rate of return= ((selling price-acquisition price)+ dividends received)/acquisition price E.g ((1000-900)+80)/900=20%

Required rate of return

CAPM Rf+B*(RM-Rf) Rf = risk free rate on government
securities B= beta (measures volatility) Rm= market rate of return Rm-Rf= risk premium

HOLDING A LONG POSITION ON A SHARE

profit

profit 0 Loss Contract price Current market price

Ex-dividend and Cum-dividend

.
Cum Dividend Ex -dividend

3 days

Divided declaration

X-div date

Date of record

Dividend paid