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Financial Markets

Multiple Choice 1.5 20% on financial news 40% on class material

No final exam
Presentation Why is it a good investing opportunity or why not?

I. Session 1
1. Value vs Price
a. Price is what you pay; value is what you get
b. Price doesnt tell you anything
c. Market capitalization all the shares of that company x price.
i. Market Cap/Earnings = P/EPS
d. EPS- value created by the company for the shareholders
e. Share split more attractive for real investors; is splitting the share
seems more approachable when in reality the underlying value of the
company has not changed. This may be to the fact that the price for
the stock has risen and is greater than other stocks within the same
2. Price Earning Ratio
a. P/EPS
3. Absolute Evaluation
4. Comparable transactions- a non-listed company based on x sales multiple,
EBITS multiple maybe a listed company
5. West Texas Index/ BRENT
6. Example: Oil
a. US stopped buying oil, so that lead to a big drop in the market also
companies kept pumping oil into the market.

Why financial markets exist?

Provide Capital
Government fund raising
Government bond main source of financing; is a promissory note issued by a gov.
promising to pay its holder a predetermined and fixed amount of interest each year
and pay back the initial amount.
Government bonds = not safe investments; there are many crises.
Govies are fixed-income investments Bondholders receive a fixed amount of
interest, the coupon
b. Coupon is paid every quarter, semester or year.
c. Two main risks : Interest might not be paid and par value might not
be returned to bondholder at maturity.
Liquidity risk One would think twice before investing if
one was not sure to get the money back.
Liquidity risk - situations in which a party interested in trading a specific asset
cannot do it
because nobody in the market wants to trade that asset. Ex : How do you sell
shares in a non-listed company ?

II. Liquidity : Example in stock markets

a) Total : Biggest listed company in France 500m of
shares traded per day Apple, leading technology company in
the US $2.2b of shares traded per day, i.e. 2b
Liquidity expressed in price to share traded: liquidity depends on the numbers of
sellers and buyers, if you decided to sell you will find in front of you more sellers; i
Liquidity is one way for investor to assure they can move in and move out without
affect the price too much.

How to measure liquidity? Volume (# of share) x to Price

Liquidity depends on size of the company - bigger then more money will flow
however it also depends on the number of share that will circulate in the market.
Free float shares that are freely flying in the market;
Ex: apple 100% free float = lots of liquidity
Ex: 45% free float
% of shares that are publicly owned and not owned by gov., or internal promoters,
interest controlling investors, company officers.
Private Equity hold Co T
PE owns 100% of hold co which in turn owns T at 100%; use dividends to pay debt.
Once paid it is time to sell.
Large Cap very liquid
Mid Cap - somewhat liquid
Small Cap no liquidity

III. Stock Principles

When you buy stocks, you buy a small piece of equity (in case of bankruptcy liability
depends on the amount of money that was invested) which in turn means you have
a piece of assets. Thus you have access to financial information; you have a lot of
transparency when it comes to data.
There are two options either with the extra cash, 1. is they reinvest and the money
becomes a fixed asset or 2. they in turn distribute dividends.
When there is a lot of money in bs mgmt. begins to look for ways to invest/spend
the cash.
Voting rights
1 share = 1 vote
Ex: A Shares vs B shares - some include voting rights others dont.

IV. Asset Valuation

Benefits the value for the share/assets are always present where as in a company
which is not traded the price that a buyer thinks is right will probably differ from the
price the seller is putting on the asset.
Those that are listed are priced by the value the market puts it at.
Price Earnings ratio for 2016 to try to predict future. We should look at what
investors are expecting for the specific company; it is a good thing only when the
market is not wrong. What they are expecting for 2017 for example may not be
right as bad things can happen and there can be a difference between what is
expected and what will happen.
Company can use the cash to buy a share in the market when there is an excess in
cash and when the market is low
Share Exchange an offer made by a company to give one security in return for
another security.
Ex: BMW 1 @ 10e DAI 2 @5e or 5 for 9

V. Stock Markets Over the World

Largest exchanges in the world are run by private companies.
Private company looking for listing can set up an IPO anywhere it wants. Size matter
in the exchange business ; the sector tends to consolidate.
The more companies Ive got at an exchange the more control.
US Market Structure
Trading floor
Alibaba (biggest IPO)
Stock Market Indices
Only look at a sample of companies; those that have the most influence on the
market. If those are going up then the market will probably go up
Dow Jones Industrial Average (DIJA)
30 companies - is the sample used to measure the market whether it is going up or
down (NYSE)
Price weighted indices price per share.
Sometimes the biggest company do not dominate the DIJA bc it is price weighted
which means that the info used is price not the market value.
NASDAQ composite make index putting together all companies. Take all
companies listed in NASDAQ based on market cap, larger free float, etc

Bull vs Bear
Bull mkt going up
When the mkt has gone up by 20%,
Bear mkt going down
When the mkt has gone down by 20%, from the low point

VI. Other Financial Instruments

AN option contract that gives a buyer the right to buy something but does not
make it an obligation to buy/sell an asset at a specific price on or before a certain
An option = a security; its traded on the market.
ETFs Exchange Traded Fund
Replicates/ tracks the performance or a reference index. Already made investments
that are the same exact copy and paste of a premade index
Passive investment only looking to duplicate the effects of a market.
Annual fee - 0.2%
Attractive cost bc they are exempt from redemption fees. Mgmt. fees are deducted
directly from the daily net asset value.
Index- just to compare where market is now.
ETF -really invest; asset mgmt. product; it is going to replicate an index.
physical ETFs follow the index - Less dangerous
Synthetic ETF they rely on derivatives ex: swap
Swap contract hiring a third party; swap the performance of my portfolio to the
performance of the index; swap agreement is based on the original portfolio
I have priced the swap x cost bc I know how much the portfolio is worth. The third
party then pays the difference; however, if the third party Is dead, then you may
never see the payment (counterpart risk). They analyze the risk and tell them what
the price will be. Price the risk the right way.

Synthetic vs Physical

Session 2 Why getting listed

1. Gearing Ratio close to 1; bankers are likely to say to look

for financing elsewhere.
Equity/ Debt

2. Financial Leverage close to 3; limit for the bank measures

the capacity to generate cash

Find all useful information, historical data, history of the company.

Hard to sell shares in a non-listed company.
Good way to bring liquidity to shareholders
A. Scenario 1: Cash need; IPO for capital increase; issuing of new shares
B. Scenario 2: IPO is going to act as an exit strategy for private equity investor.
Selling existing shares; no issues of new shares the value of the company
does not change.

Portfolio Diversification
IPO Process
Listing Place: NYSE, Euronext
Market going down: more sellers than buyers
Free florat smaller = smaller liquidity
Free float shares that are tradeing freely
1. GloCos - managing the deal
2. Joint Bookrunners 2-6 working witht the glocos to find investors
3. Real Managers

SPIE in numbers
Final IPO Price
Value Investing Price Earning Ratio
Individual PER EPS
Market Cap/ group Earnings
Only compare number to equity

when earning are negative use:

To compute ratios.
Gross Debt- Cash = net debt position
Use earning for ratio ; debt has been taken account
If you use EBIT or EBITDA you need to put into account debt;
Entreprise Value = (# shares * share $$$) + net deb
Negative debt = extra cash and no debt.

Earnings only relates with equity.

Target Price
Germand bonds
Highest since june
Fed Reserve Rate
Only changed in dec 2015

Bayer clinches Monsanto with improved $66 billion bid

US oil settles at $49.94 a barrel, down 41 cents, or 0.81%

Price fell bc of gorwing signs of intransigence among OPEC members- limit
output. Cut production