8/3/2019 Share Price
1/23
SHARE TRADINGPrice Determination
Financial Analyst
1
8/3/2019 Share Price
2/23
2
SUMMARY
Ordinary Share
Rights/Benefits of Shareholders
Investment Process
Price vs. Intrinsic Value
Price vs. Company Performance
Options for Management
Conclusion
8/3/2019 Share Price
3/23
3
Ordinary Share
An ordinary share is a unit of ownership Ordinary shares (common stocks)
represent the proportionate ownership of a
business enterprise The ownership is divided in shares and the
proportion of any particular shareholdings
will be the number of shares held An equity security is a security providing
an ownership interest in a company
8/3/2019 Share Price
4/23
4
Rights/Benefits of a Shareholder
Right to attend the Annual GeneralMeeting (AGM) of shareholders
Right to vote at AGM to elect directors,appoint officers, decide on dividends andappoint auditors
Right to a proportional share of profitsdistributed as dividend
8/3/2019 Share Price
5/23
5
Rights/Benefits
Right to a proportional share in net assetson liquidation
Right to receive regular financialinformation on the progress of thecompany
Right to first subscribe for any new shareswhen the company comes to the market toraise new equity capital
8/3/2019 Share Price
6/23
6
Rights/Benefits
Benefits accruing from potential for priceappreciation
Using shares as collateral for a loan
Investment option for long-term
Best hedge for inflation
(Inflation an invisible thief stealing awayyour hard earned savings around the
clock!!)
8/3/2019 Share Price
7/23
Rights/Benefits - Inflation
Why does a share potentially protect anInvestor from Inflation?
Because the assets of the company will be
rising in value every year - hopefully in linewith inflationBecause the earnings of the company will
be rising in value every year - hopefully in
line with inflation
The above factors should be reflected in a
rising share price 7
8/3/2019 Share Price
8/23
Rights/Benefits - Inflation
However, if the company allows its assets todeteriorate or does not grow its earnings -its share price will fall.
Other things constant investors will benefitfrom:
Rising asset valuesRising earnings
8
8/3/2019 Share Price
9/23
Investment Process
Broker or Investment Advisor
There is no fixed formula for finding abroker or adviser
Choose the one you feel good with him orher (it is a matter of chemistry!!)
Ask for recommendations Or just march into brokerage house and
ask what they can do for you.
9
8/3/2019 Share Price
10/23
10
Investment Process
Licensed stockbroker/adviser will: Open a brokerage and Central Depository
System account (CDS)
Discuss with you securities suitable foryour investment objectives
Transact on your behalf on the Exchange
(trading platform)...at what price? ...whether it is a buy or sell?
8/3/2019 Share Price
11/23
11
8/3/2019 Share Price
12/23
Price vs. Intrinsic Value
(Nominal Value, Market Price/Value, BookValue and Intrinsic Value)
What determines share price??
Demand and supply forces
Liquidity situation in the economy or
market Information with news contents
Speculative motive
12
8/3/2019 Share Price
13/23
Price vs. Intrinsic Value
what determines share price??
Comparable market variables
- Price-to-earnings ratio- Price-to-book ratio
These ratios are commonly used to decidewhether the share price is under, orovervalued.
13
8/3/2019 Share Price
14/23
Price vs. Intrinsic Value
What determines value?(Other names: Fundamental or underlying or
fair value)
Company performance Competitive position and its sustainability
Growth rate and return on invested capital
- Rapid growth rates in assets earning rateof return equal to or greater than cost offunds = creates value, otherwise value will
be destroyed. 14
8/3/2019 Share Price
15/23
Price vs. Intrinsic Value
Deriving Intrinsic value
Definition: Intrinsic value of any investmentis the present value of its anticipated,future cash flows discounted at anappropriate discount rate.
Anticipated future cash flows: depend on thecompanys performance in generating
revenues and controlling costs so as togrow the bottom-line: profit to ordinary
shareholders 15
8/3/2019 Share Price
16/23
Price vs. Intrinsic Value
Deriving Intrinsic value
Appropriate discount rate: depends on thecompanys cost of funds (capital), i.e. the
rate of return required by the providers ofcapital to the company. It reflects how thecompany is rated in terms of riskiness.
The higher the cost of funds the lower thecompanys value, ceteris paribus!
16
8/3/2019 Share Price
17/23
Price vs. Intrinsic Value
How to calculate Intrinsic value?
PV = CF1/(1+d) + CF2/(1+d)2+
..CFn/(1+d)n
PV= Present value (Intrinsic value)
CF= Anticipated cash flow
d= discount rate (cost of funds)In a perfect world the PVabove should
equal the market share price
17
8/3/2019 Share Price
18/23
Price vs. CompanyPerformance
Does Company Performance affect price
Directly: No
Indirectly: Maybe yes: companys splendidperformance may feed into demand, justas poor performance may result into weakdemand and possibly more supply.
18
8/3/2019 Share Price
19/23
Price vs. CompanyPerformance
Extended disparity between share price andcompany performance may result from thefollowing:
- Market inefficiency
- Market sentiments
- Composition of shareholders (Investorsand speculators)
- Non-market factors
19
8/3/2019 Share Price
20/23
Investors/Shareholders??
It doesnt matter for long-term investors aslong as company fundamentals are solid,and investment objectives haven't
changed
Focused approach to investment willweather any short-term market euphoria
Close follow-up on company affairs, withthe professional help of an advisor
20
8/3/2019 Share Price
21/23
Options for Management
What can the management do if marketdo not mirror performance??
Continue to focus on strategic goals andvalue enhancements
Develop the language to communicatewith shareholders
Road show to drum up the performance.
Buy back shares: price might increasebecause of less shares in circulation
21
8/3/2019 Share Price
22/23
Conclusion
A stock is not just a ticker symbol or anelectronic blip, it is an ownership interestin an actual business, with an underlying
value that does not depend on its shareprice.
.Benjamin Graham
22
8/3/2019 Share Price
23/23
Conclusion
The market is a pendulum that foreverswings between unsustainable optimism(which makes stocks too expensive) and
unjustifiable pessimism (which makesthem too cheap). The intelligent investor isa realist who sells to optimists and buys
from pessimists.
.Benjamin Graham23
Top Related