FIN3703A

Financial Markets
04: Equity Market (part 2)

Dr. YUE Ling

1 Sem1 AY2022/23
 FIN3703A

The Equity Market

Part 1:
I. Stock Exchanges
• Types of orders and markets
• NYSE, Nasdaq, SGX, alternative players
II. Trading of Stocks (SGX)
• Contra, margin, short selling

Part 2:
I. Primary Equity Market
• Raise equity

II. Types of Securities

• Shares: ordinary and preference
• Depository receipts
• ETFs and REITs
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 Primary Equity Market

Payoff Structures
• Debtholder

Payoff

What does this payoff structure resemble?

0 D Value of firm
100

___________ Zone

resemble short put

3 since debt is 100 if firm value is 200, shareholder get 100
 Primary Equity Market

Payoff Structures
• Equity holder (limited liability)

Payoff

What does this payoff structure resemble?

0 D 100 Value of firm

___________ Zone

5
if firm value is 100, shareholder get 0 as debt is 100
 Primary Equity Market

Payoff Structures un limited liability

• Equity holder

Payoff

0 D100 Value of firm

if firm value is 50, and debt is 100, shareholder return is -50 not 0 as there is unlimited
7 liability
 Primary Equity Market

IPO (Initial Public Offering)

Public offering vs. Private placement

• Advantages of raising public equity?

Ability to raise large amount of funds
increase credibility due to more public accountability
higher bargaining power with creditors and banks
image enhancement

• Disadvantage of raising public equity?

issuing cost
resulation compliance cost
loss of privacy
dilution of control
pressure to pay dividend share & buy back

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 Primary Equity Market

IPO: pricing
• Determination of issue price
• Fixed price
• Single strike price auction
• Discriminatory pricing auction

• Underpricing of IPOs: Pw = price wholesale

ib firms buy stocks at pw which is below ipo price

• IPO price < closing price on the first trading day

• Widespread phenomenon, a lot of studies!

• Average underpricing:
• Loughran, Ritter, and Rydqvist (1994, updated frequently)
• IPO data: https://site.warrington.ufl.edu/ritter/ipo-data/

• IPOs under perform in long run (more than 5 years)

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 Primary Equity Market

IPOs are underpriced everywhere

Source: https://site.warrington.ufl.edu/ritter/ipo-data/, accessed on 28 Sep 2022.

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 Primary Equity Market

IPOs are underpriced everywhere

Source: https://site.warrington.ufl.edu/ritter/ipo-data/, accessed on 28 Sep 2022.

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 Primary Equity Market

IPOs on U.S. major exchanges

Source: https://site.warrington.ufl.edu/ritter/ipo-data/, accessed on 28 Sep 2022.

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 Primary Equity Market

Interesting features of the IPO market

• There are “hot periods” for IPOs:
• Normally during bull run
• Many IPOs
• Higher trading volume
• Higher first day returns

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 Primary Equity Market

Jay R. Ritter (2018)

Source: https://site.warrington.ufl.edu/ritter/ipo-data/, accessed on 28 Sep 2022.
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 Primary Equity Market

Other ways to go public

• Direct listing e.g spotify, its best if company is easy
• The company sells shares directly to the public without getting
help from intermediaries.

• SPAC IPO
• Special Purpose Acquisition Company
• SPACs are blank check companies created by a sponsor,
which go public to raise capital and then find a non-listed
operating company to merge with, in the process taking the
operating company public.

• Reverse IPO privsate coy buy public coy and become public
• A private company goes public by acquiring a currently
publicly listed company.

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 Primary Equity Market

Source:
https://www.cbinsight
s.com/research/report
/what-is-a-spac/,
accessed on 28 Sep
2022.
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 Primary Equity Market

Delisting
• Involuntary
• A firm ceases operation, goes bankrupt or fails to meet listing
requirements.
• E.g., SGX watch-list: https://www.sgx.com/regulation/watch-list

• Voluntary
• A company chooses to leave the exchange of its own accord
• M&A: e.g., Super Group acquired by JDE.
• Change of business strategy: e.g., Mary Chia.
• The perceived costs of staying listed outweigh the benefits
• Delist from one exchange to relist elsewhere

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 FIN3703A

The Equity Market

Part 1:
I. Stock Exchanges
• Types of orders and markets
• NYSE, Nasdaq, SGX, alternative players
II. Trading of Stocks (SGX)
• Contra, margin, short selling

Part 2:
I. Primary Equity Market
• Raise equity

II. Types of Securities

• Shares: ordinary and preference
• Depository receipts
• ETFs and REITs
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 Types of Securities

Ordinary/common Shares
• Voting rights
• Most common or ordinary shares are 1 share = 1 vote
• Some have varying degree of voting rights in order to retain
control
• Everything else constant, shares with different voting rights
should be priced differently
• In 2018, SGX allowed listing of dual-class shares

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 Types of Securities

Preference Shares
• Higher priority to claim than ordinary shareholders in dividend
payment and in the event of liquidation
• Amount of dividend is fixed
• Usually no voting rights
• Hybrid between bond and shares
• Similar to common shares: no maturity
• Similar to bonds: fixed payment

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 Types of Securities

Depository Receipts (DRs) impt

negotiable CD
negotiable means transferrable

• Negotiable (__________)
transferable securities which represent foreign firms’
publicly traded equity
• The foreign firms’ shares in the firm’s home market are purchased
and placed in a custodian bank
• A depository bank in the investors’ country issues depository
receipts.
• The depository receipts are traded in the investors’ local
exchanges or OTC
• Dividends are paid in the local currencies
• This arrangement allows investors in one country to invest in the
securities of another country

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 Types of Securities

American depositary receipts (ADRs)

• Started in 1927 by JP Morgan to trade the shares of a British
chain of supermarkets
• A US bank buys a bulk of shares from the firm, rebundles and
reissues them on NYSE, AMEX, or Nasdaq
• Rebundling: specific number of shares per ADR so that the price
per ADR will be attractive to the US investors: between $10 to
$100 per ADR
• The ADR trades like any ordinary stocks
• Trading price and dividends are in US$
chinese stocks are listed in the usa as DR, hence we call it ADR

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 Types of Securities

American depositary receipts (ADRs)

• Although prices of ADRs depends on demand and supply
• ADRs will normally be traded at prices close to the prices in the
home market after taking into account the exchange rate, lest
there will be arbitrage opportunity
• Risks?

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 Types of Securities

Other DRs
• European depository receipts (EDR)
• DRs in Europe and denominated in Euro

• Global depository receipt (GDR)

• Raise capital in more than 1 country
• Usually, one offering in the US market
• The second offering is in a second country which is normally
in Europe (either in London or Luxembourg)

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 Types of Securities

DRs in Singapore
SGX Cross-Listing of ADRs
• Launched on Oct 22, 2010
• Started with 19 big Chinese firms
• Subsequently, SGX added 8 more
• Now the fewer ADRs are left
• … with zero trading volume on a typical trading day (link to SGX
ADRs trading)

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 Types of Securities

Exchange Traded Funds (ETFs)

• ETFs are open-ended investment funds listed and traded on a
stock exchange. They aim to track the performance of an underlying
index (e.g., Straits Times Index) or asset class (e.g., commodities).

• ETFs are hybrid of open- and closed-end funds:

• Trade like a stock (closed-ended)
• Tracks NAV and no fixed number of units (open-ended)

• Small investors (retail) can only buy and sell the ETFs like stocks
• Large investors (institution) can trade through creation and
redemption process

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 Types of Securities

ETF Creation and Redemption

• Large investors (institution) can trade through creation and
redemption process
• Creation: deposit a portfolio of the underlying securities and
receive ETF shares
• Redemption: exchanging ETF shares for the portfolio of
underlying securities
• Creation and redemption is done in creation units (block size
of say 100,000 shares) and through designated brokers or
dealers

• Arbitrage through creation and redemption keeps the ETF price

close to the NAV. the AP will buy and sell to make sure the etf price is close to underlying nav

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 Types of Securities

ETF Creation and Redemption Process

Source: SSGA, https://www.ssga.com/us/en/intermediary/etfs/resources/education/how-etfs-are-created-and-redeemed,

accessed on 28 Sep 2022.
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 Types of Securities

ETF Arbitrage buy etf shares from market for 49 and return it to sponsor at 50.

• ETF price may differ from its NAV: arbitrage.

• Primary market: Authorized Participants (APs) and Lead Market
Makers (LMMs) can correct mispricing by exchanging shares of ETFs
with underlying basket securities, i.e., creation and redemption.
• Secondary market: Hedge funds and other high-frequency traders can
take advantage of mispricing by taking L/S positions.

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 Types of Securities

US Has the Largest ETF Market

Source: 2022 Investment

Company Fact Book.

ETF Examples (US) Index

iShares Various bonds and stock indices by BlackRock
Spyders or Spiders Family of ETFs by S&P Global (including SPDRs, StreetTRACKS)
Diamonds SPDR Dow Jones Industrial Average
VIPERs Various Indices by Vanguard
PowerShares QQQ Nasdaq 100 Index by Invesco Ltd
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 FIN3703A

Source: 2022 Investment Company Fact Book.

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 Types of Securities

ETFs in Singapore
• Slow start: 5 cross-listed
• Number of ETFs listed in 2008: 14
• Number of ETFs listed in 2009: 36
• Currently, SGX has a respectable repertoire of ETFs
• Current market information of ETFs
• Indices tracked: Commodities, Equities, Fixed income, REITs

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 Types of Securities

Real Estate Investment Trusts (REITs)

• Real Estate Investment Trusts (REITs) are funds that invest in a
portfolio of income generating real estate assets such as shopping
malls, offices or hotels, usually with a view to generating income
for unit holders of the fund (i.e. investors of the REITs).

• REITs allow investors to access real property assets, and share

the benefits and risks of owning a portfolio of properties.

• Assets of REITs are professionally managed and revenues

generated from assets (primarily rental income) are normally
distributed at regular intervals to investors.

• SGX introduction of REITs

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 Types of Securities

REITs in the US
• Started in the late 19th century as pass-through entities to pass
through as much profit to investors as possible. For that they are
able to avoid double taxation (at corporate level and at individual
level).
• Pays more dividends (interest) than ordinary stocks (bonds): pass
more than 90% of profits to investors
• Stable income source
• Most REITs get their profits from rental income
• Can be traded like any ordinary shares in exchanges hence more
liquid than real estate properties
• Historically less volatile than and less correlated with other
financial assets
In USA reits avoid double taxation
normal firm in usa pay corproate tax for dividend and individual have to pay individal tax on dividend again
reits dont need to pay corporate tax

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 Types of Securities

REITs in Singapore
• SGX started with the first REIT in July 2002: CapitaMall Trust
• MAS allows REITs to invest in other assets but the majority of their
assets must be made up of real estate or real estate-related
assets
• Granted "tax transparency" treatment by the Inland Revenue
Authority of Singapore (similar to the avoidance of double taxation
in US)

• SGX Chartbook on REITs and Property Trusts (May 2022)

• Number of trusts: 44
• Market cap: S$117 bn (13% of total market cap)
• Average distribution yield in 2021 is 6.2%
• 10-year annualized total returns among the REITs ranges from -
10.1% to 15.4%

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 Types of Securities

The Singapore REITs Market

43 Source: SGX
 Types of Securities

The Singapore REITs Market

44 Source: SGX
 Types of Securities

The Singapore REITs Market

45 Source: SGX
 FIN3703A

SGX sources
• SGX Securities Products
• SGX Market Statistics
• SGX Securities Prices
• SGX Monthly Trading Summary for ETFs
• SGX Chartbook on REITs and Property Trusts (Jun 2022)
• Chartbook in May 2022

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