Share Price

8/3/2019 Share Price

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SHARE TRADINGPrice Determination

Financial Analyst

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SUMMARY

Ordinary Share

Rights/Benefits of Shareholders

Investment Process

Price vs. Intrinsic Value

Price vs. Company Performance

Options for Management

Conclusion


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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


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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


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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


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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!!)


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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


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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

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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.

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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?


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(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

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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.

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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


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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


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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!

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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

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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.

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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

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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

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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

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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

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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

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