Media and Journalism Module Business and Economics For Reporters

1. Media and Journalism ModuleBusiness and Economics For Reporters 11. Understanding the sharemarket BER, Ppt11

2. This week’s lesson • The sharemarket: • see how publicly listed companies perform • provides useful information for the business journalist • Main elements of the stock or share market • Components of the market: • stocks or shares • bonds and mutual funds • how they are bought and sold • why they act as they do • Discussion of the importance of the stock tables • real life examples from the South Pacific Stock Exchange to explain how the tables should be interpreted BER, Ppt11

3. Shares and the stock market BER, Ppt11

4. Specialised terms and help! • The share market and its associated business includes many terms that will be new to you • Some key terms we will discuss in more detail during this week’s lesson • We will also provide you with a list of terms and definitions for reference • HELP FOR THIS PRESENTATION: • Words in this presentation that look like this can be clicked on to show the definition – try it now, click on the word “this” above BER, Ppt11

5. What are shares? • When you buy shares in a company, you are buying a part of that company • You share in the company's performance in the form of profits which can be given to you as dividends and/or capital growth through the value of your shares increasing • The company you are investing in benefits by using your money and that of other investors to finance its business or its expansion, without having to borrow money • Shares in private companies are not listed on the stock exchange BER, Ppt11

6. What are shares – public companies? • A company can raise money by ‘going public’ or ‘floating’the business i.e. listing on a stock exchange and issuing shares to investors • investors partly own the company’s business and become shareholders in the company • The money raised in this way is called equity capital (debt capital is borrowed money): • does not need to be repaid • represents ownership of the company • shareholders can receive dividends and other benefits • Shares can be sold to other investors • Shareholders may realise capital gains if the share price has risen i.e. they can make a profit by selling their shares for more than they paid for them BER, Ppt11

7. The role of the SPSE • The South Pacific Stock Exchange (SPSE) operates a sharemarket in Fiji: • regulates stocks and share trading • to list a business on the SPSE: • submit details of the business and the proposed share issue to the Capital Markets Development Authority (CMDA) for approval • on meeting the Official Listing Requirements of the Exchange and CMDA, the company will be listed • once listed, the Company is required to disclose all ongoing developments and material information to the market as required under SPSE Listing Rules. • The Exchange: • makes regular market announcements • releases all information about the listed company to the public. • The SPSE provides a regulated market for trading existing stocks between investors • The SPSE is the centre for: • trading, • reporting • pricing of the stocks • All transactions are immediately released to the public ensuring transparency in market dealings BER, Ppt11

8. How share prices are determined BER, Ppt11

9. Why do share prices go up and down? • Why does the price of shares change over time? • the price of anything that can be bought or sold is unpredictable • many factors can simultaneously affect values both positively and negatively • Need to analyse: • supply of and demand for the shares • the inherent value of the shares • other less direct influences on share prices The impact of many individual factors is sometimes quite predictable so as journalists you can accurately determine what probably will happen to the prices. BER, Ppt11

10. Supply and demand • The sharemarket is a market place • Forces of supply and demand determine the price of shares • The more people want to get hold of a particular share, the higher its price • If people no longer want a share and few people are willing to buy it, people may have to offer it at a very low price in order to sell it • Supply and demand for shares is influenced by some of the following factors BER, Ppt11

11. Inherent value of future earnings • Dividends: • immediate and concrete value to shareholders • a share that pays dividends has an inherent value • the price of a share will often fall by approximately the dividend amount when the share goes ex-dividend • to be entitled to a dividend a shareholder must have purchased shares before the ex-dividend date • A share that offers a strong likelihood of capital growth due to reinvesting company profits also has a certain amount of inherent value. BER, Ppt11

12. Analyzing earnings • Consider ability to pay dividends or provide capital growth in the future • what are its expectations of future earnings? • most important factor affecting the price of a share is the company’s future earnings prospects - determine the future inherent value of a share • changes in forecast earnings will impact the share price • Past earnings: • found in the company’s annual report • important indicator of a company’s earnings ability • ALSO consider the impact of any changes to the business: • a change in senior management • new efficiency measures • product innovations • industrial action • the acquisition of another business BER, Ppt11

13. Other factors • Economic factors both locally and overseas affect share prices: • distinguish between short-term reaction to announcements of economic data and • longer term direction of price trends and whether prices might be expected to turn around • Most share prices are affected by local economic factors: • overall economic growth • level of unemployment • consumer confidence • spending • inflation • the value of the local currency • a rising currency can benefit importers but disadvantage exporters BER, Ppt11

14. Other factors • All countries are part of the global economy: • local share prices are affected by economic conditions overseas • Movements on overseas exchanges can have flow on effects to the domestic market • Partly a result of reliance by local companies on overseas markets for a portion of their profits • The globalised economy allows the funds of overseas (and local) investors to flow rapidly into and out of the local sharemarket as prevailing conditions change. BER, Ppt11

15. Other securities BER, Ppt11

16. What are mutual funds? • A mutual fund pools your money with other investors' and the capital is used to invest in a diversified portfolio of securities • Mutual funds are professionally managed to pursue each fund’s specific goal • As an investor in a mutual fund, you become a shareholder in a large portfolio of stocks, bonds and/or money market securities (or some combination of them). • As a shareholder, you are entitled to a share of the capital appreciation, interest and dividends (or losses, as the case may be) • One of the benefits of a mutual fund is the opportunity to obtain greater diversification at a relatively inexpensive cost because generally, your share of the portfolio will cost less than to purchase all of the individual securities held separately BER, Ppt11

17. What are bonds? • A bond is an interest-bearing or discounted government or corporate security that calls for the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the security at maturity. • The bondholder has an IOU from the issuer • no corporate ownership privileges, • Issued by states, cities, counties, school districts, housing authorities, hospitals and other municipal agencies, municipal bonds are used to fund local governments and the building of roads, bridges, sewer systems, schools, and other projects BER, Ppt11

18. A word on options • Many large stockmarkets, e.g. Australian Stock Exchange, provide a market for derivatives including: • exchange-traded put and call options • company issued options • warrants • Futures • These options derive their value from movements in: • share prices • indices and • a limited range of commodities to which they relate Most business journalists will need to understand a little about options, even if the stock exchange for your country does not trade in options. BER, Ppt11

19. A word on options • Exchange Traded Options and warrants: • widely accepted by sophisticated retail investors in the major exchanges of the world • Two of the most common strategies: • protect the value of shares • earn income during flat periods • Provide leveraged returns and as such are a favourite among speculators • Exciting for the investor BUT a speculative approach which carries substantial risk BER, Ppt11

20. Exchange Traded Options (ETO’s) • Available for the top 100 stocks and several indices. • Options are standardised contracts: • investors buy and sell shares at a fixed price for the life of the option • When used in conjunction with a portfolio, options can provide more stable long-term returns BER, Ppt11

21. Company issued options • Issued by small/mid capitalisation companies for the purpose of raising funds • They have: • an exercise price • an expiry date • cease trading a designated number of business days before expiry • Give potential and existing shareholders the opportunity to buy additional new shares at a future date • The underlying shares are purchased when the option holder exercises their right and pays the exercise price BER, Ppt11

22. Warrants • A financial instrument issued by banks and other institutions and traded on a stock exchange • Provide investors an alternative way to gain exposure to a variety of assets, such as shares, to achieve a desired result • There are different types of warrants : • investment purpose – e.g. instalments • longer-dated, tend to be less frequently traded and have a lower risk/return profile • trading purpose – e.g. trading warrants • shorter-dated, traded frequently and have a higher risk/return profile BER, Ppt11

23. Warrants • Use instalments to: • gain leveraged exposure to shares or • baskets of shares or • listed managed investments such as exchange traded funds (ETFs). • Reasons to invest include leverage, diversification, generating dividend income and extracting cash. • Instalments allow you to gain exposure to shares (and other securities) by making a part payment upfront and delaying an optional final payment until a later date. • This allows an investor to buy shares for part of the current share price while receiving the benefits of potential capital growth, dividends and franking credits BER, Ppt11

24. Leverage • Margin lending: • the term for borrowing money from a broking firm or bank to buy shares and using those shares as collateral for the loan • investors use margin lending to buy more shares than they would otherwise be able to • Another type of loan is a Protected Equity Loan: • allows an investor to borrow the total value of a share parcel from a pre-determined list of shares • high minimum borrowing amounts and high rates of interest • when the loan matures, if the shares are worth less than the loan, the lender takes the shares in full satisfaction of the loan BER, Ppt11

25. BER, Ppt11

26. Understanding stock tables BER, Ppt11

27. Stock Table • South Pacific Stock Exchange • Sample Trading Summary • 3rd April 2007 BER, Ppt11

28. Reading the trading summary Listed companies on the exchange BER, Ppt11

29. Reading the trading summary three digit code assigned by the exchange to the listing so that it can be easily recognised BER, Ppt11

30. Reading the trading summary price of the shares the last time it was traded BER, Ppt11

31. Reading the trading summary price at which the shares started the trading day BER, Ppt11

32. Reading the trading summary Change value is given as a dollar figure and as a percentage representing the difference BER, Ppt11

33. Reading the trading summary number of trades made in the day BER, Ppt11

34. Reading the trading summary number of shares traded BER, Ppt11

35. Reading the trading summary Value of shares traded BER, Ppt11

36. Reading the trading summary Remaining buying and selling interest Buy - the highest price at which investors are willing to buy shares Sell - the lowest price at which investors wish to sell BER, Ppt11

37. Market list BER, Ppt11

38. Market list Earnings per share in cents BER, Ppt11

39. Market list Price -earnings ratio: Shows the number of times the price covers the earnings per share. BER, Ppt11

40. Market list Dividend per share: dividend for the financial year quoted as cents per share BER, Ppt11

41. Market list Dividend yield: The dividend shown as a percentage of the last sale price for the shares. BER, Ppt11

42. Market list Market Capitalisation: The total number of shares on issue multiplied by their market price. BER, Ppt11

43. Market list % of Market Capitalisation: The % each listed company hold of the total market for the exchange. BER, Ppt11

44. Closure The important thing is not to stop questioning. Albert Einstein BER, Ppt11

45. Summary BER, Ppt11

46. Coming up! • Unique challenges facing us when we report on specialized ‘beats’ or conduct specialised journalism • Next week we’re looking at the particular areas of: • markets • real estate • merchandising • banking and finance BER, Ppt11

47. BER, Ppt11 http://www.elliottwave.com/features/default.aspx?cat=emw&aid=2118&time=pm

48. Definitions These are hyperlinked pages to references in the presentation. You do not need to go through these separately in class. BER, Ppt11

49. DEFINITION CONGRATULATIONS This is how you view the hyperlinked definitions Click the Return icon to go back to the page you left BER, Ppt11

50. DEFINITION - Float • The initial raising of capital by public subscription to securities, such as shares offered on the sharemarket • Capital - cash for capital assets or to operate a business. It also refers to the value of an investment in a business, or in assets such as property or shares. • Securities - A general term applied to all shares, debentures, notes, bills, government and semi-government bonds etc. BER, Ppt11