An Introduction To The Financial Markets

T H O M S O N F I N A N C I A L

T H O M S O N F I N A N C I A L

Examine the basic terminology that occurs in the City

Explain what is meant by ‘The Market’ and ‘The City’

List the different financial instruments and why they are used

Focus on the Equity Market-

What is a share?

Why do companies issue them?

How are they issued?

Why invest in shares?

Examine the different types of share

Review what is meant by a ‘Corporate Event’ or ‘Capital Changes’

Look at the two UK Equity markets

Objectives

T H O M S O N F I N A N C I A L

What is a Market?

The most BASICBASIC financial institution

A place where buyersbuyers and sellerssellers exchange goods and services

The Financial MarketsFinancial Markets- Flow of Capital

London

Manner of Trading

T H O M S O N F I N A N C I A L

The term the ‘City’ refers to London’s financial and commercial institutions

The city is a market for money

• Savers are sellers of money and deposit cash in return for interest

• Borrowers are buyers of money who pay interest for the ability to borrow

• Financial services account for 25% of GDP and are the largest UK export.

T H O M S O N F I N A N C I A L

• Places for money that is available for short periods. Deposits and short-term financial instruments.

• Banks temporarily short of funds can borrow while those with a surplus can put it to work

• Market for professionals

The Money Markets

T H O M S O N F I N A N C I A L

• What are shares?

• Why does a company issue shares?

• How are they issued and traded?

• Why invest in shares?

The Stock Market

T H O M S O N F I N A N C I A L

What is a Share?• The buyer of the share becomes an owner of

the company

• Shareholders have the right to vote on issues at annual general meetings

• Shares are also referred to as equities as ownership carries an equal share in the company and its profits

• There are two types of share: ordinary and preference

T H O M S O N F I N A N C I A L

Ordinary Shareholders

• Own company

• May receive dividends but not guaranteed

• Last person to be paid if the company goes bankrupt

• Have right to vote at company AGM

• Will receive company annual report

T H O M S O N F I N A N C I A L

Preference Shareholders

• Own company

• Receive a set dividend

• If company goes bankrupt preference shareholders are paid before ordinary shareholders

• No voting rights

• In special cases may be converted to ordinary shares (Convertible Preference Shares)

T H O M S O N F I N A N C I A L

Why Does a Company Issue Shares?

It is a way of raising large amounts of capital

The public can invest in the company

This capital is then available to fund growth, research & development and expansion

It is an alternative to obtaining bank loans, issuing bonds and seeking private investment

T H O M S O N F I N A N C I A L

Shares offered to the general public through the media

Public are invited to apply for prospectuses

Can then apply for shares by electing to invest a certain amount of cash

If oversubscribed you will receive a certain percentage of the requested amount (usually smaller investors receive higher percentages)

A merchant bank will underwrite the offer and set a price range of what shares will be issued at

Example – Orange

The Offer for Sale

T H O M S O N F I N A N C I A L

The Placing

• Shares are sold to private investors rather than being offered to the general public

• The placing is usually arranged by the companies stock broker

• The broker will place shares with their clients

• Once the shares are placed permission is given to trade the shares in the normal way

T H O M S O N F I N A N C I A L

The Introduction

• If a company already has a large spread of shareholders it can request permission that its shares can be traded on the stock market

• New capital is not raised initially – expectation is that in the long term capital will be raised

• The status of the company changes from limited to PLC

• Anyone can now buy shares in the company

T H O M S O N F I N A N C I A L

Issuing New Shares- Corporate Events/ Capital changes

Companies may issue new shares in two main ways:

• Rights issue- To raise money

• Scrip or Bonus issue- To lower the share price

T H O M S O N F I N A N C I A L

Rights Issue• New shares are issued by offering existing shareholders the right to

buy more shares

• Shares are offered in proportion to the number of shares the investor holds

For example, a 1 for 4 rights1 for 4 rights issue means that for every 4 4 shares an investor holds they have the right to buy oneone more

BTBT EXAMPLEEXAMPLE

T H O M S O N F I N A N C I A L

What is a company worth?

• The total value of all the shares issued by a company is known as market value or market capitalisation

• It is calculated by multiplying the number of shares by the current market price

• If the share price rises so too will the market value

T H O M S O N F I N A N C I A L

The relationship between price and market value Vodafone- Price Against Market Cap 14/5/02

NOV DEC JAN FEB MAR APR90

100

110

120

130

140

150

160

170

180

190

200000'S

60

70

80

90

100

110

120

130

140

VODAFONE GROUP

VODAFONE GROUP - MARKET VALUE(R.H.SCALE)

HIGH 193.25 6/12/01, LOW 95.25 7/5/02, LAST 102.75 13/5/02 Source: DATASTREAM