Financial Market

黄晓霞
东凌经济管理学院
hxiaoxia@manage.ustb.edu.cn
Chapter Preview
 We examine the markets where stocks trade, and
then review the underlying theories for stock
valuation. We learn
that stock valuations is quite difficult. Topics
include:
 Investing in Stocks
 Computing the Price of Common Stock
 How the Market Sets Security Prices
 Errors in Valuation

2
Chapter Preview (cont.)
 Stock Market Indexes
 Buying Foreign Stocks
 Regulation of the Stock Market

3
 Investing in Stocks
4. Right to vote for directors
1. Represents ownership and on certain issues
in a firm 5. Two types
2. Earn a return in  Common stock
two ways  Right to vote
 Price of the stock rises  Receive non fixed dividends
over time  Preferred stock
 Dividends are paid to  Receive a fixed dividend
the stockholder  Do not usually vote unless
3. Stockholders have the firm has failed to pay the
promised dividends
residual claim on all  Has priority over the claims
assets of common shareholders
but after that of creditors
such as bondholders

4
Investing in Stocks

 The orderly flow of information, stock

ownership, and funds through the stock
markets is a critical feature of well-developed
and efficient markets. This efficiency
encourages investors to buy stocks and to
provide equity capital to business with valuable
growth opportunities.

5
 Investing in Stocks: How Stocks
are Sold
 Organized exchanges
 Account for over 72% of total dollar volume
 Largest U.S. Exchange is the NYSE
 Second largest U.S. Exchange is the American Stock Exchange
 Others include Nikkei (Japan), LSE(England), DAX(Germany), etc.
 Listing requirements exclude small firms
We will see some of the requirements in later slide.

 Over-the-counter markets
 Best example is NASDAQ (National Association of
Securities Dealers Automated Quotation System)
 Dealers stand ready to make a market

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Investing in Stocks: Organized
vs. OTC
 Organized exchanges (e.g., NYSE) p191
 Auction markets with floor specialists
 25% of trades on the NYSE are filled directly by

specialist
 Remaining trades are filled through SuperDOT

(Super designated orderTurnaround system)

 Over-the-counter markets (e.g., NASDAQ)

 Multiple market makers set bid and ask prices
 Multiple dealers for any given security
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Investing in Stocks: ECNs

ECNs (electronic communication networks)

allow brokers and traders to trade without the
need of the middleman. They provide:
 Transparency: everyone can see
unfilled orders
 Cost reduction: smaller spreads
 Faster execution
 After-hours trading

8
Investing in Stocks: ECNs

However, ECNs are not without

their drawbacks:
 Don’t work as well with thinly-traded stocks
 Major exchanges are fighting ECNs, with an
uncertain outcome

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美国主要证券交易市场上市条件
  Exchange NYSE Nasdaq- Nasdaq- AMEC OTC.BB
global Market capital market

交易所名称 纽约证交所 纳斯达克全 纳斯达克小 美国证交所 OTCBB 交

国市场 资本市场 易所
最低有形资产 6000 万美元 1500 万美元 500 万美元 400 万美元 否 N/A
净值
税前净利要求 250 万美元 100 万美元 或 75 万美元 75 万美元 否 N/A

最低发行市值 6000 万美元 800 万美元 500 万美元 300 万美元 否 N/A
要求
最低发行股数 110 万股 110 万股 100 万股 100 万股 否 N/A
要求
最低股东人数 2000 人 400 人 300 人 400 人 否 N/A
要求
做市商数量 4 3 3 3 3

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Computing the Price of Common
Stock
Valuing common stock is, in theory, no different
from valuing debt securities: determine the
future cash flows and discount them to the
present at an appropriate discount rate.

We will review four different methods for valuing

stock, each with its advantages and drawbacks.

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 Computing the Price of Common
Stock: The One-Period Valuation
Model
 Simplest model. It assumes that you buy the stock, hold

it for one period to get a dividend, then sell the stock.

 To evaluate the stock today, find the present discounted
value of the expected cash flows consisting of one
dividend payment plus a final sales price.
 Price =
Div1 P1

(1  ke ) (1  ke )
The discount rate used is the required return on investments in
equity rather than the interest rate. (p193)

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Computing the Price of Common
Stock: The One-Period Valuation
Model
What is the price for a stock with an expected
dividend and price next year of $0.16 and
$60, respectively? Use a 12% discount rate
Answer:
Price =
0.16 60
  53.71
(1  0.12) (1  0.12)

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 Computing the Price of Common
Stock: The Generalized Dividend
Valuation Model
 The concept remains the same as one-period

model, but dividend period is extended to infinite

number.  Di v Pn
 (1  k
t
)t

(1  k )n
 Price = t 1 e e

which can be simplified

 as
Divt
t 1 (1  k ) t
 Price = e

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 Computing the Price of Common
Stock: The Gordon Growth Model
Generalized dividend value model requires we
compute the present value of an infinite stream of
dividends, which is a difficult process. To make the
model simple, we have the following assumptions:
 Dividends grow at a constant rate forever.
 The growth rate of dividends, g, is less than the
required return on the equity, ke.

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Computing the Price of
Common Stock: The Gordon
Growth Model

which can be simplified as

See example 2 on page 196.

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Computing the Price of Common
Stock: The Price Earnings Valuation
Method
 The price earnings ratio (PE, 市盈率 ) is a
widely watched measure of how much the
market is willing to pay for $1.00 of earnings
from the a firm.

 PE Ratio = Price/Earning

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Computing the Price of Common
Stock: The Price Earnings Valuation
Method
If the industry PE ratio for a firm is 16, what is
the current stock price for a firm with earnings
for $1.13 / share?

Answer:

Price = 16 x $1.13 = $18.08

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Computing the Price of Common
Stock: The Price Earnings Valuation
Method
 If the earning per share is expected to
increase to $2 next year, what is the
expected price if the PE remains the same?
 Price = 16 x $2 = $32

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How the Market Sets Security
Prices
 What can you learn from the auto buying
example on page 197?
 The price is set by the buyer willing to pay the
highest price.
 The market price will be set by the buyer who
can make the best use of the asset.
 Superior information can play an
important role.

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How the Market Sets Security
Prices
 Consider the following three valuations for a stock with
certain dividends but different perceived risk:

 Bud, who perceives the lowest risk, is willing

to pay the most and will determine the “market” price.

The point is that the players in the market, bidding against each
other, establish the market price.
When new information is released about a company, expectations
change, and with them, prices change.

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Errors in Valuations
Although the pricing models are useful,
market participants frequently encounter
problems in using them. Any of these can
have a significant impact on price in the
Gordon model.
 Problems with Estimating Growth
 Problems with Estimating Risk
 Problems with Forecasting Dividends

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Stock Market Indexes

 Stock market indexes are frequently used to

monitor the behavior of a groups
of stocks.
 Major indexes include the Dow Jones
Industrial Average, the S&P 500, and the
NASDAQ composite.

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 Buying Foreign Stocks
 Buying foreign stocks is useful from a
diversification perspective. However, the purchase
may be complicated if the shares are not traded in
the U.S.
 American depository receipts (ADRs) allow foreign
firms to trade on U.S. exchanges, facilitating their
purchase.
 U.S. banks buy foreign shares and place in its
vault ( 保管库 ), and issue receipts against the
shares in U.S. markets.

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 Depository Receipts, DR & American Depository
Receipts, ADR
股票存托凭证与美国股票存托凭证
 Foreign stocks often trade on U.S. exchanges as
ADRs.
 外国股票通常以美国存托凭证的方式在美国交易。
 It is a receipt that represents the number of foreign
shares that are deposited at a U.S. bank.
 它（ ADR ）是一种代表一定数量外国股票存在美国
银行的数据凭证。
 The bank serves as a transfer agent for the ADRs.
 银行充当美国存托凭证的交易代理商。
 Foreign listing and ADRs
 In the United States, trading is in American Depositary Receipts
(ADRs). Under this arrangement foreign shares are deposited
with a U.S. bank, which in turn issues ADRs in the name of the
foreign company. To avoid unusual share prices, ADRs may
represent a combination of several foreign shares. Conversely,
some ADRs represent a fraction of the original share.
 e.g.1 Japanese shares are often priced at only a few yen per
share. They are therefore combined into lots of 100 or more so
that their value is more like that of a typical U.S. share.
 e.g.2 The NASDAQ ADR of LVMH, the French luxury-goods firm,
represents one-fifth of a French share.
 American Depository

Receipts
Characteristics of trading ADRs as opposed to direct
investment in the company’s shares:
 ADRs are denominated in U.S. dollars, trade on U.S.

exchanges and can be bought through any broker.

 Prices for ADRs are quoted in U.S. dollars, and

dividends are paid in dollars, and dividends are paid in

U.S. dollars.
 ADRs trade during U.S. market hours and are subject to

similar clearing and settlement procedures as American

stocks.
 Most underlying stocks are bearer securities, the ADRs

are registered.
 Unsponsored ADR and sponsored
 ADR
Unsponsored ADR: An ADR program created without the
company’s involvement is usually called an unsponsored ADR.
Unsponsored ADR are over-the-counter (OTC) shares and are
traded through pink sheets, electronic bulletin boards, or an
electronic trading system called PORTAL.
 无保荐的存托凭证其发行没有发行基础证券的外国公司的介入。无
保荐的存托凭证是场外市场股票，它通过粉单市场、电子公告板系
统或者 PORTAL 电子交易系统进行交易。
 OTC ( 场外交易 / 柜台交易 )means trading does not take place in
a central marketplace where buyers and sellers congregate.
 Sponsored ADR: An ADR program created with the assistance
of the foreign company is called a sponsored ADR. Sponsored
ADRs are classified at three levels: I, II, and III.
 Sponsored ADR
 Level I: The company does not comply with SEC registration and
reporting requirements, and can be traded only on the OTC
market.
 Level II: The company registers with the SEC and complies with its
reporting requirements, and can be listed on an official U.S. stock
exchange (NYSE, ASE) or NASDAQ.
 Level III: The company’s ADRs are traded on a U.S. stock
exchange or NASDAQ and the company may raise capital in the
United States through a public offering of the ADRs.
 SEC, Securities and Exchange Commission
 Note: Level I company can also raise capital in the United States,
but it must be done through a private placement. The retail sector
is excluded. Furthermore, liquidity of ADRs on the OTC market is
not good.
 美国存托凭证
发行的程序 ADR 投资者

A1 A3

B1 B7

美国经纪人 托管人
A2 B6

B5
纽约股票交易 纳斯
OTC B2
所 / 美国证券交 达克
易所 B4
本地经纪人 托管银行

B3

本地交易所
 Mechanism of
issuance of ADRs ADR investor

A1 A3

B1 B7

Broker in US Depository
A2 B6

B5
NYSE/AMex Nasdaq OTC B2

B4
Local borker Custodian bank

B3

Local exchange
Xiaoxia Huang
Univ. of Sci. & Tech.
Beijing
hxiaoxia@manage.ustb.e
du.cn
 发行 ADRs 的程序

 美国存托凭证购买和发行的程序：两种模式
 已有的美国存托凭证
 A1 ：投资者在美国市场上向经纪人发出指令
 A2 ：美国的经纪人在相应的市场上购买美国存托凭证
 A3 ：美国存托凭证的结算和支付（用记账或记凭证的方式）
 新的美国存托凭证
 B1 ：投资者给在美国的经纪人发出指令
 B2 ：在美国的经纪人给当地的经纪人（美国以外）发出等额股票的指令
 B3 ：当地的经纪人在当地市场上购买股票
 B4 ：当地的股票由托管银行托管
 B5 ：股票存放的托管人接收证明
 B6 ：托管人发行信贷美国存托凭证并支付给美国的经纪人
 B7 ：美国存托凭证的结算和支付（用记账或记凭证的方式）
ADR
Example
 我国企业在美发行和上市 ADR 的方式有三种 : 将 H 股
转为 ADR 将 B 股转为 ADR; 直接发行 ADR(N 股 ) 。

例如，在香港地区发行 H 股的上海石化，将 H 股转换成 ADR

和 GDR （全球存托凭证 ），分别在美国和欧洲配售，结果欧美
投资者认购踊跃 ， 融资 2.2 亿美元 ， 取得比在香港地区发售
更好的效果。

Xiaoxia Huang
Univ. of Sci. & Tech.
Beijing
hxiaoxia@manage.ustb.e
du.cn
China and international equities
 Financing options of Chinese enterprises in
international equity markets:
 我国企业在国际股票市场上的筹资方式：
 （ 1 ） Via Depositary Reciept, DR
 境外存托凭证
 （ 2 ） Via Back-door listing overseas.
 境外借壳上市融资
 （ 3 ） Via investment funs
 境外投资基金融资
International equities （发行）
国际股票
 Cross-listing ( 境外上市 ) refers to a firm
having its equity shares listed （上市） on
one or more foreign exchanges, in addition to
the home country stock exchange.

 In particular, MNCs often cross-list their shares,

but non-MNCs also cross-list.
 A firm may decide to cross-list its shares for
many reasons
 1) Cross-listing provides a means for expanding the investor
base for a firm’s stock, thus potentially increasing its demand.
Increased demand for a company’s stock may increase the
market price.
 境外上市可以扩大公司股票的投资者基础，从而可以潜在地提高对其股票的
需求。对公司股票的需求的增加可以提高该公司股票的市场价格。
 2) Cross-listing establishes name recognition of the company
in a new capital market, thus paving the way for the firm to
source new equity or debt capital from local investors as
demands dictate. This is especially important for firms with
limited capital markets to cross-list their shares on exchanges
in developed countries with enhanced capital market access.
 境外上市可以提高公司在新的资本市场上的知名度，从而可以在必要时从当
地投资者那里筹集新的权益或债务资本。这对所处资本市场规模有限的公司
，在发达国家的资本市场上市，意义尤为重要。
 3)Cross-listing into developed capital markets with strict
securities regulations and information disclosure require-
ments may be seen as a signal to investors that
improved corporate governance is forthcoming.
 如果一家公司按照严格的证券管制和信息披露要求在发达国家的资本市场
上境外上市，就会使投资者觉得公司治理已经开始改善。

 4) Cross-listing brings the firm’s name before more

investor and consumer groups. Local consumers may
more likely become investors, or local investors may
more likely become consu-mers of the company’s
products if the company’s stocks or products are locally
available.
 境外上市使公司为更多投资者和客户知晓。如果公司股票或产品在当地有售，
那么该地区的消费者（投资者）更有可能变为该公司的投资者（消费者）。
  5) Cross-listing may mitigate the possibility of
a hostile takeover of the firm through the
broader base created for the firm’s shares.
 境外上市可以通过为公司股票创造出更宽泛
的投资者基础，从而降低遭受敌意收购的可
能。

Xiaoxia Huang
Univ. of Sci. & Tech.
Beijing
hxiaoxia@manage.ustb.e
du.cn
Regulation of the Stock Market

 The primary mission of the SEC is “…to

protect investors and maintain the integrity of
the securities markets.”
 The SEC brings around 500 actions against
individuals and firms each year toward this
effort. This is accomplished through the joint
efforts of four divisions.

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Regulation of the Stock Market:
Divisions of the SEC
 Division of Corporate Finance: responsible
for collecting, reviewing, and making
available all of the documents corporations
and individuals are required to file
 Division of Market Regulation: establishes
and maintains rules for orderly and
efficient markets.

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Regulation of the Stock Market:
Divisions of the SEC
 Division of Investment Management:
oversees and regulates the investment
management industry
 Division of Enforcement: investigates
violations of the rules and regulations
established by the other divisions.

41
Chapter Summary

 Investing in Stocks: we developed an

understanding of the structure of the various
trading systems, including exchanges and
OTC markets
 Computing the Price of Common Stock:
various techniques for valuing dividends and
earnings were presented

42
Chapter Summary (cont.)

 How the Market Sets Security Prices: the

basic idea that prices are set by the “highest
bidder” was reviewed.
 Errors in Valuation: difficulties in determining
dividends, growth rates, and/or required
returns can have a significant impact in the
pricing models.

43
Chapter Summary (cont.)
 Stock Market Indexes: a way to track
changes in valuation for a broad group
of stocks
 Buying Foreign Stocks: potential benefits for
diversifications, simplified by the use
of ADRs.
 Regulation of the Stock Market:
the primary function of the Securities
and Exchange Commission

44
 Chinese stock market
 Please include the following points:
1) Types of stock markets
2) How the market sets the price
3) Main requirements for being listed
4) Indexes
5) Return fluctuation and risk sources
6) How foreign capital enter the stock markets and
how domestic capital in foreign stock markets

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