Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 2. Learning Objectives
- Understand the nature of corporations and reasons for public
listing
- Discuss the role of primary and secondary markets in equity
financing
- Explain the derivatives and interest rate roles of a stock
exchange
- Understand the electronic trading and settlement systems for
share market transactions
- Explain the importance of information flows for share market
efficiency
- Identify the main regulators of the share market
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 3. Chapter Organisation
- 4.1The Nature of a Corporation
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 4. 4.1 The Nature of
aCorporation
-
- A formal exchange facilitating the issue, buying and selling of
equity securities
- Publicly listed corporation
-
- A company whose shares are quoted and traded on a formal stock
exchange (SX)
-
- The principal form of equity issued by a corporation, which
bestows a claim to residual cash flows and ownership and voting
rights
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 5. 4.1 The Nature of aCorporation
(cont.)
- The corporation differs from other business forms
-
- Ownership claims are widespread and easily transferable
-
- Owners (shareholders) do not affect the day-to-day affairs of
the company
-
- Shareholders liability is limited to
-
-
- T heissue price of shares of a limited liability company
-
-
- Any partly paid portion of shares of a no-liability
company
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 6. 4.1 The Nature of aCorporation
(cont.)
- Advantages ofthecorporate form
-
- Can obtain large amounts of finance for a relatively cheap
cost
-
- The liquidity of securities facilitates investor
diversification and encourages investment in corporate
securities
-
- Separation of ownership and control facilitates
-
-
- Appointment of s pecialised management
-
-
- Greater effectiveness in the planning and implementation of
strategic decisions
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 7. 4.1 The Nature of aCorporation
(cont.)
- Advantages ofthecorporate form(cont.)
-
- Perpetual successionthe corporate form is unaffected by changes
in management or ownership
-
- The corporate form is suited to large-scale operations
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 8. 4.1 The Nature of aCorporation
(cont.)
- Disadvantages of the corporate form
-
- Maindisadvantage arises due to the separation of ownership and
control
-
-
- Conflict of interest between owners (principals) and managers
(agents) known as the agency problem
-
-
- Management maytry to run business for their own benefit, rather
than that of shareholders, i.e. maximise shareholder value (share
price)
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 9. 4.1 The Nature of aCorporation
(cont.)
- Disadvantages of the corporate form (cont.)
-
- Factors moderating conflict of interest between owners and
managers
-
-
- Investors ability to sell shares in a corporation, causing the
share price to fall
-
-
- Dismissal from the board at AGM by shareholders
-
-
- Threat of takeover and loss of employment
-
-
- Use of performance incentives, such as share options
-
-
- More rigorous corporate governance
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 10. Chapter Organisation
- 4.1 The Nature of a Corporation
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 11. 4.2 The Stock Exchange (SX)
- Interest rate market role
- Trading and settlement roles
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 12. Primary market role
- The SX f acilitates the efficient and orderly sale of
newfinancial securities
-
- New floats/initial public offerings (IPOs)
-
-
- Initial listing of a corporation on the SX
-
-
- Issue of additional shares to existing shareholders on a
pro-rata basis
-
-
- Issue of new shares to selected institutional investors
-
- Dividend reinvestment plans
-
-
- Reinvestment of dividends into corporation for additional
shares
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 13. Primary market role (cont.)
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 14. Primary market role (cont.)
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 15. Secondary market role
- The SX f acilitates trading in existing shares
-
- No new funds are raised by the issuing company
-
- An active, liquid, well-organised secondary market increases
the appeal of buying new shares in the primary market
-
-
- Ratio of share turnover to market capitalisation
-
-
- Number of shares on issue x current share price
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 16. Secondary market role (cont.)
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 17. Derivative market role
- TheSX provide s a m arket for tradingequity -related derivative
products
-
- A derivative is a financial security that derives its price
from an underlying commodity (e.g. gold) or financial instrument
(e.g. Fosters shares)
-
- Derivative products are described as
-
-
- Exchange-traded contracts
-
-
-
- Standardised financial contracts traded on a formal
exchange
-
-
- Over-the-counter contracts
-
-
-
- Non-standardised contracts negotiated between writer and
buyer
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 18. Derivative market role
(cont.)
- TheSX provide s a m arket for tradingequity -related derivative
products (cont.)
-
-
- R isk management tool(hedge)
-
- Derivatives traded onaSX include
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 19. Interest rate market role
- The listing, quotation and trading of typically longer-term
debt instruments on a SX
-
- Floating rate notes (FRNs)
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 20. Interest rate market role
(cont.)
- This role adds value to a debt issue due to
-
-
- Information about price, yield, maturity, credit rating of debt
instruments
-
-
- Electronic trading system facilitates buy and sell orders at
minimum cost and time delay at current market prices
-
-
- Quotation on a SX provides access to a wider market
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 21. Trading and settlement roles
- The ASX uses CLICK XT, an integrated computer-based trading
system to trade all listed securities
-
- Clients orders are executed via computer from the brokers
office
-
- Orders are executed in orderof timerecei ved and the buy/sell
price
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 22. Trading and settlement roles
(cont.)
- The ASX usesCHESS (Clearing House Electronic Sub - register
System)
-
- Facilitates the settlement of transactions conducted through
CLICK XT
-
- S ettlementof t ransactions within 3 days(T + 3)
-
- Provides an electronic sub-register that records the ownership
of listed securities
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 23. Trading and settlement roles
(cont.)
- CDI( CHESS Depositary Interest)
-
- Electronic depositary receipts issued by the ASX representing
uncertificated (scriptless) securities
-
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- CUFS (CHESS Unit Foreign Securities) for equity securities
-
-
- DI (Depositary Interest) for debt and bearer securities
-
- Overcomes problems of countries not
recognisinguncertificatedholdings or the electronic transfer of
legal title
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 24. Information role
- Investor confidence in the Australian Stock Exchange (ASX)
relies on informational efficiency
-
- The current share prices should reflect all information
available in the market
- The ASX has a critical role in facilitating the flow of
information to the market
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 25. Information role (cont.)
- Listing rules are SX rules with which a listed entity must
comply
- Examples of information disclosures required by ASX listing
rules
-
- A change in a companys financial forecasts
-
- Appointment of a liquidator
-
- Declaration of a dividend
-
- Disclosure of directors interests
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 26. Regulatory role
- The aim of r egulationis to ensure market participants have
confidence in the integrity of market operations
- Two main supervisors in Australia
-
- Australian Stock Exchange ( ASX )
-
- Australian Securities and Investment Commission( ASIC )
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 27. Regulatory role (cont.)
-
- Ensures listed companies meet specified limited levels of
performance and standards of information disclosureso investors can
make informed decisions
-
- Prescribes appropriate behaviour of broker participants on the
exchange
-
-
- Sanctions include discipline, penalties, loss of licence
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 28. Regulatory role (cont.)
-
- Electronic surveillance systems to monitor trading behaviour of
market participants
-
-
- Detect tradesthat fall outside certain limits
-
-
- C ross-references all trades against information on the
relevant company, directors and associated parties
-
- The National Guarantee Fund (NFG) compensates investors in the
event of failure or misconduct by a stockbroker
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 29. Regulatory role (cont.)
-
- Responsible for the supervision of Corporations Law and markets
in Australia ( Corporations Act 2001(Cwlth))
-
- Responsible for market integrity and consumer protection across
the financial system , covering investment, insurance and
superannuation products
-
- Supervises the ASX, addressing the potential conflict of
interests as a publicly listed corporation
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 30. Chapter Organisation
- 4.1 The Nature of a Corporation
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4- 31. 4.3 Summary
- Corporate form of organisation has advantages (fundraising and
management) and disadvantage of separation of ownership and
control
- The SX has a number of market roles
- ASX monitors market participants and ASIC supervises
Corporations Law and market integrity
Copyright2007 McGraw-Hill Australia Pty LtdPPTs t/aMcGraths
Financial Institutions, Instruments and Markets 5eby Viney Slides
prepared by Anthony Stanger 4-