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THE SHARE MARKET

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THE OBJECTIVES OF THECHAPTER

Define shares and the share market, and list and discussdifferent 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 marketinformation Discuss the determinants of the level of share prices

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What is a share

The words shares, equities and stocks areused 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.

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WHAT IS THE ROLE OF JSE?

JSE provides a formal market in whichshares/stocks are traded.

JSE provides a platform for raising ofcapital by borrowers in the primary marketand the secondary and trading of these

financial assets in the secondary marketby lenders and borrowers.

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What is the difference betweenshares and debt financing.

Risk? Income?

Maturity? JSE vs BESA

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Central Securities Depository: Whatis its role?

This is a body that acts as a custodian acting onbehalf of the participants holding shares in the

dematerialized environment. Dematerialized environment has eliminatedshare certificate and replaced it with anelectronic scrip register.

The body executes transfers of shares betweenthe accounts of the holders through bookentries.

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Accounting principles

Assets- investor Equity- issuer

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Different classes of shares

PREFERENCE SHARES These are share that ranks higher than ordinary shares and

have a higher priority when it comes to distribution ofdividends. They usually carry no voting rights.

PARTICIPATING PREFERENCE SHARES Shares that grant a holder predetermined dividends inaddition to sharing into the remaining profits. These sharesreceive a specified dividend at a fixed nominalpredetermined rate

CONVERTIBLE PREFERENCE SHARES

Preference shares that may be converted to ordinary sharesaccording to specified terms and conditions. The conversioncan be made compulsorily or it may be voluntary. They carrya fixed predetermined dividend rate.

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Different classes of sharescontinued

REDEEMABLE PREFERENCE SHARES These are shares that grant the issuing company

an option to redeem the shares at apredetermined price and time.

CUMULATIVE PREFERENCE SHARES If the company does not have funds to pay

dividends, the dividends on the cumulativepreference shares accrue until fully paid.

ORDINARY SHARES

Holders of this kind of shares have a right to voteon company matters and are entitled to share inprofits after payment of interest on debt anddividends on preference shares.

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Different classes of sharescontinued

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 isdeferred for either a specified period or after aspecified amount of dividends on ordinary shareshas been attaint.

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

absence of the share register, the identity of thebearer who is also the owner of the share is notknown to the issuing company. Ownership isdetermined by physical possession of the sharecertificate.

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The Primary and Secondary Sharemarkets

Primary Market in the share/equity marketis a market in which new share are traded.

Secondary market is a market in whichpreviously issued shares are traded.

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SECONDARY MARKET

SECONDARYMARKET

FORMALMARKET

OVER THECOUNTER

DIRECT TRADES OFF EXCHANGE

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HOW IS THE PRICE OF A SHAREDETERMINED?

The trade-between demand and supplydetermines 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

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Different types of equity financing

Acquisition of assets Rights issue

Sript dividend or capitalization issueVia prospectus

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How companies qualifies for listing

For a private company to be listed on JSEand be given a quotation it has to change

to a limited liability public company.

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JSE listing requirements

A company has to publish prelistingstatement disclosing full initial information

on the affairs of the company. Fulfill all the listing requirementsAnd adhere to the rules and directives of

JSE

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Types of share transaction on theJSE

Arbitrage transactionThis is a simultaneous purchase or sale of a

share and sale or purchase of the sameshare thereof in a different market.

Bear sale

Sale of shares not owed by the seller atcurrent market price, in anticipation ofbuying the shares at a price lower thanthe selling price.

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Types of share transaction on theJSE

Put-thru transactionThis is a transaction concluded by a

stockbroker that is a JSE member firm onbehalf of its own clients by simultaneouslybuying and selling the same shares at the

same market price to both parties.

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Types of share transaction on theJSE

A special Bargain transaction Is a transaction that is beyond the

capacity of the market price. Thistransaction involves different buying andselling brokers

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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 theorder is routed to a special terms orderbook

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Calculation and valuation concepts

Return on shares= dividends + capital(gains/losses)

Two prices are quoted a bid price and an offerprice

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

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Sales price/contract price is the price atwhich the deal was struck.

Closing price is the last price for aparticular trading day.

Market-to-market

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Profitability as determinant of shareincome

Total return/ or realized rate of return=((selling price-acquisition price)+dividends received)/acquisition price

E.g ((1000-900)+80)/900=20%

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Required rate of return

CAPM Rf+B*(RM-Rf)

Rf = risk free rate on governmentsecurities

B= beta (measures volatility)

Rm= market rate of return Rm-Rf= risk premium

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HOLDING A LONG POSITIONON A SHARE

Loss

profit

Contract price

0

Current

market

price

profit

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Ex-dividend and Cum-dividend

.Cum Dividend Ex -dividend

3 days

Divided declaration X-div date Date of

record

Dividend

paid