1. Chapter Eight Stock Exchanges

2. Stock and Shares Strictly speaking, stocks are fixed interest securities and shares are equities Share indices are usually based on market capitalization and are calculated every minute In most economies the major shareholders are investment institutions (e.g.; pension funds, insurance companies and mutual funds) rather than private shareholders. The world’s ageing populations will lead to a growth in funded pensions

3. Stock and Shares (cont.) Taking capitalization at the end of 2010, the sequence of the Stock Exchanges in the world is: 1 NYSE Euronext (US) 2 NASDAQ OMX 3 Tokyo 4 London 5 NYSE Euronext (Europe) 5 Shanghai 6 Hong Kong 7 TSX Canada

4. Stock and Shares (cont.) If we take equity turnover only, however, our top seven become: 1 NYSE Euronext (US) 2 NASDAQ OMX 3 Shanghai 4 Tokyo 5 Shenzhen 6 London 7 NYSE Euronext (Europe).

5. Stock and Shares (cont.) With new issues, shares may be a public offer for sale (or initial public offering). The alternative is the private placing, although sometimes a mixture of both is used An offer of more shares to existing shareholders is a rights issue A scrip issue offers shareholders free shares and a split divides the par value of the existing shares. The objective in both cases is to lower the price to improve liquidity. A consolidation replaces a number of existing shares by one new one to enhance the price. A scrip dividend is an offer of shares instead of cash dividends

6. Pension Funds How active the equity market is usually depends on the activity of institutional institutions, especially pension funds The biggest markets for pension funds are the U.S., Japan, the U.K., Canada, Australia, the Netherlands and Switzerland Defined benefit schemes relate to pension benefits being linked to final salaries; you know roughly what your pension will be years before you retire as it’s linked to the number of years of contributions and a calculation relating to final salaries A defined contribution scheme is like any other long-term investment – pension payments are linked to the performance of the pension fund over its lifetime

7. Mutual Funds Mutual funds are collective investments run by fund managers. They may be investments in money market instruments, equities or bonds. Indeed, nowadays, there are funds whose investments are in financial futures These mutual funds are well established in the U.S., the U.K., the Netherlands, France, Germany, Italy and Spain. The open-ended fund (unit trusts in the U.K.) and the closed-ended fund (investment trusts in the U.K.) are the two major forms of mutual funds

8. Dealing Systems Order-driven dealing systems are those where orders of buyers and sellers are matched. Quote- driven systems are those where market makers quote firm bid and offer prices. Hybrid systems, like New York, involve elements of both types Dealers with long positions can lend stock to gain collateral to fund their position and those with short positions can borrow stock (offering collateral) to match their sales. This is stock borrowing and lending. Very large deals are bought deals or block trades

9. Analysts’ Ratios When a firm goes public, we look at the relationship between the price of similar shares and the profit per share to guide us as to the correct offer price of the new share. This is the price/earnings ratio (p/e) We also look at the likely dividend as a percentage of the share price to calculate the gross dividend yield. To check if the latter is achieved by giving away all the profit, we compare the profit per share to the net dividend to calculate the cover ratio Finally, analysts look at the earnings per share

10. Stock Exchange Rules The Markets in Financial Instruments Directive (MiFID) came into effect on 1 November 2007, replacing the existing Investment Services Directive (ISD). A proposed update to these rules, known as MiFID 2, will come into force in late 2015 They introduced new rules for a wider range of EU investments firms, covering transparency of trades and increasing reporting requirements. Investments firms also have to adhere to the EU Capital Adequacy Directive In the U.S., the New York Stock Exchange acquired Archipelago, the electronic exchange, and then Euronext, creating NYSE Euronext, which covers trading in New York and various European capital and derivatives markets NASDAQ has merged with the American Stock Exchange and acquired Instinet, the electronic exchange