UNIT 3 STOCKS AND SHARES OBJECTIVES unit will help you to: * understand the role of the major financial instruments traded on the Stock exchanges; © be able to identify the risks involved in stock exchange activities; * connect the current economic/financial environment with the toxic assets market. ee LEAD- ill in the gaps in the text below with the words that follow: a) stock prices; b) investment banking; ©) basic ownership; d) going public; ¢) underwriting; ) common stock; g) initial off h) underwriters; i) market value; j) initial public offering (IPO); k) preferred stock; 1) tombstone. Issuing New Stock The first time a company’s stock is issued, the company is said to be (1) ..... . This . The ‘means that the owners of the company are selling part of it to the general publ formal name for this process is (2) Usually, a company offering stock for sale places a special kind of adver ment in the financial press, called a (3) ..... . T provides potential investors with specific information about the company. It includes price per share, which is the (4) ..... of the stock. The price of shares when offered for the first time is the (5)The offering of shares is dealt with by the (6) ..... , Who actually buy up all the shares for sale and sell them on the market. This is referred to as (7) ..... and is handled by the (8) ..... division of a securities firm. Companies can issue two kinds of stock-the first offers owners a share in the direct success or failure of the business and represents the (9) ..... of a corporation . This type of stock is called (10) Common stock owners benefit directly through inereases in (11) ..... . The other type of stock offers holders dividends which are distributed to them before common stock holders and is called (12) (from Pratten, eS READING The paragraphs in the text below have been scrambled. Reconstruct the logical Banking English, OUP, 2001, p. 68) sequence, using as prompts the items in italics. Bonds | (A) Companies finance most of their activities by way of intemally generated cash | flows. If they need more money they can either sell shares or borrow, usually by sue their own bonds rather than issuing bonds. More and more companies now i borrow from banks, because this is often cheaper: the market may be a better judge | of the firm’s credit worthiness than a bank, i.e. it may lend money at a lower interest | rate. This is evidently not a good thing for the banks, which now have to lend large | amounts of money to borrowers that are much less secure than blue chip companies (B) Governments, of course, unlike companies, do not have the option of issuing | equities. Consequently, they issue bonds when public spending exces Js receipts | from income tax, VAT, and so on, Long-term government bonds are known as gilt | edged securities, or simply gilts, in Britain, and Treasury Bonds in the US. The | British and American central banks also sell and buy short-term (three month)| Treasury Bills as a way of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from circulation; to increase the money supply they buy them back, paying with newly created money which is put into circulation in this way. (C) Most bonds are bearer certificates, so after being issued (on the primary market), they can be traded on the secondary bond market until they mature. Bonds are | therefore liquid, although of course their price on the secondary market fluctuates | according to changes in interest rates. Consequently, the majority of bonds on the secondary market are traded either above or below par. A bond’s yield at any particular time is thus its coupon (the amount of interest it pays) expressed as a | percentage of its price on the secondary market. (D) For companies, the advantage of debt financing over equity financing is that bond interest is tax deductible. In other words, a company deducts its interest | payments from its profits before paying tax, whereas dividends are paid out of } already-taxed profits. Apart from this ‘tax-shield’, it is generally considered to be a | sign of good health and anticipated higher future profits if a company borrows. On } the other hand, increasing debt increases financial risk: bond interest has to be paid, ! even in a year without any profits from which to deduct it, and the prineipal has to be repaid when the debt matures, whereas companies are not obliged to pay | dividends or repay share capital. Thus companies have a debt-equity ratio that is determined by balancing tax savings against the risk of being declared bankrupt by | creditors. |) Bond-issuing companies are rated by private ratings companies such as Moody’s or Standard & Poors, and given an ‘investment grade’ according to their | financial situation and performance, Aaa being the best, and C being the worst, ©, nearly bankrupt. Obviously, the higher the rating, the lower the interest rate at which + a company can borrow. | (tom McKenzie, 1, English for Business Studies, pp. 81-82)VOCABULARY 1. Match the expressions on the left with the definitions on the right: 1, equity financing A. a security whose owner is not registered with the issuer 2. debt financing B. easily sold (tumed into cash) 3. bearer certificate. the rate of interest paid by a fixed interest security 4. liquid D. the rate of income an investor receives, taking into par account a security’s current price 6. coupon E, issuing bonds 7. yield F. issuing shares G. nominal or face value (100%) 2. Replace the words in bolded italics in the text that follows with the items listed below: a) bring about g) backer b) bilateral h) promises c) amount i) vital 4) receiver j) related to e) demand k) safeguard 1) entities 1) regard Bonds A bond is issued by a guarantor (1) — usually a bank or an insurance company, on behalf of an exporter. It is a guarantee to the buyer that the exporter will fulfill his contractual (2) obligations. If these obligations are not fulfilled, the guarantor undertakes (3) to pay a sum of money to the buyer in compensation. Bonds are usually required in connection with (4) overseas contracts, or with the supply of capital goods and services. When there is a buyer's market, the provision of a bond can be made an essential (5) condition for the granting of the contract.Bonds have, for some time, been required by Middle Eastern countries, but nowadays many other countries require them. For instance, most intemational agencies, such as the World Bank or the European Development Fund, and most government purchasing organizations (6) in the developing world, plus major purchases of goods and services in the oil sector now require bonds from sellers. Banks are usually prepared to assist their customers by giving or becoming a party to bonds, guarantees and indemnities. Once issued a bank will incur (7) a liability to honor (8) that guarantee and must consider its customer undoubted for the sum (9) involved. However, banks will always take a counter-indemnity ftom their customers in order to protect (10) themselves against a possible claim from the beneficiary. In some cases, guarantees can be issued direct to the beneficiary (11) in which case the issuing bank will specify that its own laws apply. In other cases, the beneficiary may insist, or a local law may stipulate (12), that the guarantee be issued by a local bank against the issuing bank's counter-indemnity. (from Pratten, J., Banking English, pp. 24-25)< SELF-ASSESSMENT TEST Read the newspaper article below, and try to identify the correct meaning of the following items that appear in the article. 1. regulator (2) A. a provision B. an entity which has the right to control C. something you can draw a straight line with 2. prospectus (2) A. perspective B. someone who prospects Cc ‘an advertisement in the financial press announcing a future sale of stock 3. reflotation (3) A. re-launching a boat in the water B. rebuking C. re-launching shares 4, administrator (5) A. caretaker of the building B. a foreclosure official C. a person who is in charge of re-organizing a failing business 5. audited numbers (6) A. comrect figures B. official results of an audit C. numbers everyone has heard about 6, the group’s legal claims A. the legal provisions that allow Parmalat to fight back B. the sum of money that Parmalat’s stakeholders claim as compensation C. the problems encountered by the Group of 20 after the Group of 8 have resigned 7. junior team (12) A. a brand new team B. ateam that is made up of undergraduates on an internship programme10. 12 13. 14, C. a team comprised of inexperienced professionals first-half accounts (20) A. financial statements for the first semester B. Mr Bondi’s better half C. the footings on the bottom-line Parmalat’s suppliers (24) A. the internet providers for the group B. the cattle C. the dairies that supply Parmalat with raw material in this trade signs of fading impetus (26) ‘A. signs of newly gained momentum B. signs of a weak impact C. the impression that the initial quick pace of the inquiry has slackened dilatory pace (27) A. lively step B. slowing down motion C. peace and quiet claims for damages (29) A. Parmalat’s request for receiving compensation for the losses incurred during the inquiry B. the regulator's claims for justice C. the money you are entitled to receive from your insurer in case your car is damaged 300-odd page (2) ‘A. page 300, which seems a strange one B. only the odd-numbered pages from the 300 pp. document, C. approximately 300 pages last-gasp questions (9) A. latest queries B. the last thing Mr Bondi asked before pas: C. puzzling poser . By flexing its muscles (16) A. by asking pointless questions with the purpose of showing off B. by puting difficult questionsC. by doing bodybuilding at the gym 16. he is likely to try (18) A. he enjoys trying B. he will definitely try C. he will probably try 17. This itis endeavouring to do (20) A. this is what Consob tries to do B. this is what Parmalat strive to do because they have to do it C. this isa great enterprise for Consob 18, Why would Consob hold up Mr Bondi ? (10) ‘A. Why would Consob try to delay the proceedings ? B. Why would Consob’s thugs break into Parmalat’s premises? C. Why would the armed attack influence the inquiry? armalat A curious delay ‘A deadline came and went on March 31", That was the date by which Consob, taly’s stockmarket regulator, might have approved a 300-odd page prospectus that ould have paved the way for the reflotation of Parmalat, a dairy-products group that imploded after a huge fraud was uncovered late in 2003. Instead, at the last minute, Consob faxed a long list of questions to Enrico Bondi, (5)Parmalat’s special administrator, who has been pushing hard to get the firm back on its feet. The effect has been to derail Parmalat’s timetable for recovery- audited numbers on which it was relying are now considered out of date. Consob’s approval is needed not just for he flotation of new shares, but also for creditors to vote on the next stages of Mr jondi’s strategie plan, Many of Consob’s last-gasp questions had been answered long ago, and concerns related to the (10)status of the group’s legal claims were simply perplexing to | Parmalat. But why would Consob hold up Mr Bondi? Officially it is saying nothing, ut two theories, neither flattering, have emerged.One points to the rela ly junior team appointed by Consob to handle the Parmalat + case and asks whether it has been able to keep pace with the ambitious timetable set | by Mr Bondi and the group's creditors at a meeting in March 2004. The second i remembers Mr Bondi’s criticisms of Consob, (15)among others, when he first announced how the huge fraud was done and expressed his amazement that no one F had spotted what was going on. By flexing its muscles, is the regulator trying to # teach Mr Bondi a lesson? Yet Mr Bondi has not given up. He is likely to try to persuade Consob to make a new effort that might allow a flotation in June or early July. This would depend on Parmalat quickly producing (20)audited numbers for all of 2004 instead of just first- { half accounts. This it is endeavouring to do. But Consob would also have to show | itself willing to move much faster towards approving the prospectus. Realistically, } approval will have to be given within a month if the flotation is to happen before the summer, That would certainly please creditors, including Parmalat’s suppliers, some of whom | have lost (25)patience and begun to sell their rights to shares in the refloated group. | But it would also send an important signal to foreign observers of the Parmalat mess. + Italy's initial responses to the fraud were decisive and effective, but lately there have } been worrying signs of fading impetus. Consob’s dilatory pace is one. Another is the “lack of real progress by the investigating magistrates in Parma, one of whom | recently announced his departure. Their slowness is holding up claims for damages, which (30)cannot be launched before investigators have finished their work, Consob still has the chance to reinvigorate one important part of Parmalat’s administration, If it cannot, or will not, do that, Italy’s business culture may suffer another painful blow. ! The Economist April #" 2005, p. 50 Business