NV) Stocks and shares ‘© Consider the uses of stocks and shares and ways of talking about price changes Q Discuss different possible investments Lead-in If you have money to invest, wnat are the advantages and cisadvantages of *+ putting it under the mattress + investing in property or real estate + buying lottery ticket + buying bonds + taking tallto Las Vegas or Monte Carlo *+ buying stocks or shares + depositingitin a bank + investing in a hedge fund + buying gold + giving itaway? + buyinga painting (Matisse, Van Gogh, etc.) 86Finance Reading: Stocks and shares ‘Match up the half-sentences below, which make up a text about stocks and shares. 1 Successful companies can issue stocks orshares A and a flotation or an IPO in Britain. (certificates representing part ownership of the B and one in which most of thern fallin company) value is a bear market 2. Offering these stocks for sale to financial institutions € the stock exchange on which the and the general public changes the business company is listed or quoted. 3 Selling stocks for the frsttime is called anIPO or froma private to a public company, and initial public offering in the US is called going public. 4 Companies use an investment bankto find buyers, _E i.e. how many sellers and buyers there and to underwrite the stock issue, are. 5 Stocks and shares are also known as equity or F i.e, to guarantee to buy the stocks if ‘equities; the most common form there are not enough other buyers, 6 Alter shares have been issued they can be traded —_G is called common stock in the US, and on the secondary market at ordinary shares in Britain 7 Some stock exchanges have automatic H or keep the profits in the company, computerized trading systems that match up which also causes the value of the buyers and sellers; others have market makers — stocks to rise. 8 Stock prices rise and fall depending on supply and 1. the price itis currently being traded at demand, onthe stock exchange. 9 Consequently the nominal value ofa share—the J. to raise capital to expand their price written on itis rarely the sameas its market operations price- K traders in stocks who quote bid (buying) 10 Companies either distribute part of their profits to and offer (selling) prices shareholders as an annual dividend, L which show changes in the average 11. Stock markets are measured by stock indexes (or prices of a selected group of important. indices), stocks. 12 Aperiod during which most stocks (and the stock index) are rising is called a bull market, HHH EBEH EE fe Discussion 1. Many economists argue that its (theoretically) impossible to regularly outperform the stock market, as all available information is already factored into a company's share price. So analysing a company’s finances, or trying to discover or predict patterns in price movements, isa waste of time. What implications does this have for investors? 2 Imagine that you have just come fram a secret meeting of a company's board of directors, which has made a decision that you know will financially ruin some close friends of yours unless they can sell some shares before the board's decision becomes known. You are having dinner at their home that same evening. Should they expect you to warn them? Should you do so? 3 How can you make money from a falling stock market (when prices are going down)? Stocks and shaves Unit 17 87Listening: A financial news report Listen to an extract from a financial market report on an American radio station. The newsreader mentions the prices of the following securities, currencies and commodities. in each case, does she say that the price has risen, fallen, or stayed almost the same? Eo Proern The Dow-Jones |The Sap 500 The NASDAQ ‘The terms stocks and stooknoiders are used in the USA, and shares and shareholders in Britain. In Britain, stock can also mean securities such as {government bonds. The terms stock exchange, sock market and stockbroker are used in all English-speaking countries. The most common type of equity is called common stock ip the US, and ordinary shares n Britain. Some companies also have preferred stock (Ame) or preference shares (BIE) that ‘eceive a fixed dividend. Shares in Germany Sharesin France Shares in Britain Shores in Japan Shares in Australia ‘The dollar against the euro The dollar against the pound The dollar against the yen aa Gold oi “Today share prices fell sharply on the fear that share prices might fall sharply.” ‘ww catocnstock com “Will you pleas ry to get your mind off ofthe S.P Index?” © The New YorkerVocabulary Finance_ Rather than endlessly repeating the words ‘rose’ and ell’, financial journalists use a large number of verbs and phrases to describe the movements of security prices. Classify the following sentences, according to whether you think the verb or expression means: A to rise after previously falling D to fall a little Volkswagen shares rocketed after the revelation that Porsche has upped its stake in the company to 748. 2 __The Sensex index of the Bombay Stock Exchange crashed on Monday on fears of a recession in the US. 3 Visa shot up yesterday on the NYSE on its first trading day, rising as high as $69 a share 4____The Footsie revived alittle in London in the afternoon, gaining 30 points in late trading. 5____ After the strong gains of last week, Asian shares slipped on fears of a looming recession, 6 In Milan, the SaPiMIB index plummeted, after the unions called for a three-day general stnke next week, Reading: Hedge funds Hedge funds are private investment funds for wealthy investors that trade in securities and derivatives, and try to get high returns whether markets iiuve up or down. Read the following extract from Geraint Anderson's book Cityboy, which explains one of the major strategies of hedge funds, and answer the questions. The rise of hedge funds began in earnest around 2001. By then stock markets had been in decline for around a year after the bursting of the tech bubble. With no end to the bear market in sight investors wanted to make retums that were not geared to the performance of the stock market. They wished to make an absolute return even if stock markets fell. They demanded what Cityboys, in their never-ending mission to confuse the general public, like to call B torise alittle E to fall alot © torise a lot 7 __ Leading shares were slightly weaker in ‘Switzerland, the Swiss Market Index losing 20 points. 8 Share prices recovered in Hong Kong today, the Hang Seng finishing up ten points. 9 Onthe So Paulo exchange, the Bovespa Index advanced a little, up 12 points 10__ Chinese shares jumped after a two-thirds cut ina securties trading tax. 11____Evenafter the government bailout, Citigroup is continuing to plunge, now down to$1.95, 12__ Most shares were a litle stronger in Madrid this morning, when the exchange reopened after yesterday's public holiday. ‘Alpha’ not ‘Beta’. Hence, hedge funds became increasingly popular since, unlike conventional ‘long- only’ funds, they can “short” shares. That to say, they can sell shares they don’t own by borrowing them off a conventional fund so that when the share price falls they make a profit by buying them back at Stocks and shares Unit 17 89a cheaper price. As the bear market continued cash began pouring into these funds. [...] As these hedge funds multiplied and grew, investment banks had no choice but to prioritize them relative to their old, traditional long-only clients because some of these crazy guys really like trading shares. Whilst your typical pension fund might, on average, hold on to a share for a year or more Ive seen certain hedge funds buy in the morning and sell in the aftemoon. Hell, I’ve even seen buy and sell orders in the same stock withinan hour! Oncertaindays, oneofthe biggest hedge funds, GLG, has been said to be behind five per cent of all the trades in the FTSE 100. Vocabulary note Alpha: risk-adjusted measure of the ‘active retumn on an ‘investment, ie. the ‘Tetum tat exceods normal compensation for the risk involved. ‘Abigh value for alpha implies that a stock or fond has performed Detter than would have been expected given its beta. ‘Beta: A measure of the lately or relative volatility ofa secur: the rate et which its ‘pice moves up and ‘down compared to the ‘market as a whole. 90 unit 17 1 What does ‘the bursting of the tech bubble’ mean? 2 Anderson calls the people working in the financial industry ‘Cityboys'. What implied meanings does this word convey? 3 Whatis Anderson implying by ‘their never-ending mission to confuse the general public’? 4 Explain in your own words how hedge funds make money by shorting shares. 5 Why did ‘investment banks {have] no choice but to priontize’ hedge funds? Role play: Investing a client's money Imagine that you are an asset manager, investing money for a client. In pairs or small groups, select ten different securities, and invest an imaginary €100,000 in them (or the equivalent in your local currency), dividing up the sum as you wish. Your client does not particularly want to take risks. Choose several blue chips ~ shares in large, well-established companies with a good reputation for quality and profitability — as well as two companies that have only been listed or quoted on a stock exchange for less than a year (this information can be found in the financial pages of newspapers and on financial websites). You can choose companies on any major stock exchange, but remember that if you buy stocks in foreign currencies there is a risk of exchange rate movements. A safe investment for part of the sum would be an index fund or tracker fund or exchange-traded fund (ETF) that seeks to replicate the performance of an entire market (e.g. the S&P 500), so it won't lose (or gain) more than the market as a whole. Major banks sell shares in funds like these (similar to the bond funds mentioned in Unit 16). Another possibility, if you expected interest rates to fall in the near future, would be to include some bonds in the portfolio. Follow the progress of your portfolio in the financial press or on the Internet. Depending on the length of your course, select a date to make a short presentation reporting on the how well or badly the portfolio has done, and attempting to provide reasons or explanations for any price changes. tooks and shares