Equity Market

1
Equity Market

• Lecture 4
• Part I
• Investing in Stocks

2
Main Contents

• Investment in stocks
• Common stocks vs. preferred stocks
• How stocks are sold stock exchanges and OTC
  trading
• How market sets security prices
• Stock market index
• Regulation of the stock market

3
Common Stock

• Common stocks (???), also known as equity
  securities or equities, represent ownership
  shares in a corporation. Each share of common
  stock entitles its owner to one vote on any
  matters of corporate governance.
• Difference between equity and bonds

4
Characteristics of Common Stock

• Residual claimant
• Shareholders are the last one in the line of
  all who have a claim on the corporation asset.
  Stockholders earn what is left after all of the
  debt liabilities are satisfied.
• If the company goes to bankruptcy, nothing is
  left over and the stockholders get nothing.
• If the company does well, it is possible to get
  rich as a stockholder.

5
Characteristics of Common Stock

• Limited liability
• What shareholders can lose in the event of
  failure of a corporation is just their initial
  investment. They do not need to pay the firms
  obligation using their personal assets (house,
  car, etc.).

6
Common Stock as Ownership Share

• The shareholders elect a board of directors at
  the annual meeting. The duty of the board is to
  oversee the management of the corporate to ensure
  it acts in the best interests of shareholders.
• The corporate management officers such as the
  CEO, presidents, treasurer, and other titled
  officers are usually chosen by the board to
  manage the corporation. Managers run the
  corporation on a day-to-day basis and have
  authority to make most decisions without the
  boards specific approval. The ownership is
  substantially separated from the management.

7
Common Stock as Ownership Share

• Shareholders can vote on the matters of the
  corporation by a proxy, empowering another party
  to vote on behalf of them. To get the support of
  a majority of shareholders, the management
  usually solicits the proxies.

8
Common Stock as Ownership Share

• Sometimes, a group of shareholders will wage a
  proxy fight to unseat the current management or
  altering its policy. They try to gain the proxy
  right of shareholders who do not attend the
  annual meeting in such fight so that they can
  vote for or against in their favor.

9
Dividend (??)

• A corporation make payments to its shareholders
  in the form of dividends.
• When the corporation earns a profit, some of the
  profit will be invested in the business as
  retained earnings (????), some of it will be paid
  to the shareholders as dividends. The amount and
  the date of dividend are decided by the board of
  directors.
• When the corporation suffers a loss, it may
  suspend the dividends.

10
Preferred Stock (???)

• Preferred stocks share some characteristics of
  common stocks.
• Preferred stocks pay dividends to holders. But
  such dividends could be suspended. When
  suspension happens, dividends are being cumulated
  until the next time.
• Preferred stock holders have the precedence over
  common stock holders when the corporation pays
  dividends. In other words, companies should pay
  dividends to preferred stockholders before common
  stockholders.

11
Preferred Stock

• Preferred stocks also share some characteristics
  of bonds.
• No voting right on the corporation matters
• The claim of preferred stocks must be satisfied
  before the claim of common stocks, but after
  creditors such as bondholders.

12
How Stock Are Sold

• Organized securities exchanges
• Buyers and sellers meet at an organized exchange
  on regular basis to trade stocks
• To have a stock traded on one of the exchanges, a
  firm must file an application and meet certain
  criteria.
• Some exchanges, such as New York Stock Exchange,
  are organized by an open-outcry auction model
  some are organized by electronic trading.

13
How Stock Are Sold

• Over-the-counter markets
• OTC market has no physical locations. Dealer
  make a market by buying for inventory when
  investors want to sell and selling from inventory
  when investors want to buy

The price is 49/share
Inventory
Barbara
Dealer
Please sell 100 shares of IBM for me at market.
I would like to buy 100 shares of IBM stock
No problem. The price is 50 per share.
Paul
14
Stock Market Index

• Stock market indices are introduced to measure
  the performance of stocks in a special stock
  exchange, in a special industry or with similar
  features.

15
Stock Market Index

• Major indexes around the world
• Dow Jones Industrial Average (DJIA, ?????????)
  USA
• Standard Poors Composite 500 (SPX,
  ????500????) USA
• National Association of Securities Dealers
  Quotations (Nasdaq ??)USA
• Hang Seng Index (HSI, ????) Hong Kong
• Nikkei Stock Average (??????) Japan
• FTSE 100 Index (??100??) UK
• DAX Germany

16
Regulation of the Stock Market

• A properly functioning stock market must maintain
  investors confidence. So a lot of regulation
  laws have been introduced. The main purposes are
  to (1) require firms to tell the public the truth
  about their business, and (2) require brokers,
  dealers and exchanges to treat investors fairly.

17
Regulation of the Stock Market

• The Securities and Futures Commission (? ? ? ? ?
  ? ? ? ? ? ? ?) is the entity responsible for
  administering the laws governing the securities
  and futures markets in Hong Kong and facilitating
  and encouraging the development of these markets.