MAF101 Lecture Notes - Lecture 8: Stock Trader, All Ordinaries, Financial Instrument
14 Jun 2018
School
Department
Course
Professor
MAF101 FUNDAMENTALS OF FINANCE
Kieu Trang Nguyen
Study notes
TOPIC 4 Valuation of Equity Part II- Lecture 8
*REVISION: FINANCIAL ASSETS - INSTRUMENTS
A Financial instrument or asset represents a claim to future cash flows.
Most financial assets fall into two broad categories:
1. EQUITY: represents ongoing ownership in a company. Most common type of equity is the
ordinary share. (Topic 4 Part II)
2. DEBT: a loan that obligates the borrower to pay periodic interest and repay the loan
amount at some future date
*REVISION: FINANCIAL INSTRUMENTS - EQUITY
In the form of a share in a company
➢ ordinary shares issued by a company which represent an ownership position for the
shareholder
➢ shareholder has an entitlement to share in any distribution of profits of the company
known as dividends.
➢ Equity holders are not promised any dividends. They receive any dividends that the
company may pay.
➢ The performance of an equity investment is tied to the success of the firm. Equity
investment tends to be riskier than investments in debt securities.
*CHARACTERISTICS OF ORDINARY SHARES
Represents equity (ownership) in a company.
• Unlike debt, Equity represents “permanent” capital contribution by the owners to
establish, operate and expand the business.
• Public or private companies:
➢ Public = listed on a stock exchange (ASX)
• Shares represent units of ownership in a company
• Claims to the assets of the firm. Ordinary shareholders are the residual owners of the
company and, as such, have no guarantee that they will ever receive any return on their
investment.
• Full Voting rights
• No maturity date: the life of the share is “forever”
• Shares enable investors to participate in the profits of the firm by receiving a dividend.
➢ Equity instruments are riskier than debt investment. Shareholders rank last if the
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company goes bankrupt.
• The return from owning shares:
1. Dividends (usually but not always)
2. Capital gains (hopefully if the share price increases)
*WHY ARE SHARES POPULAR?
HIGH RETURN
HISTORICAL AVERAGES – AUSTRALIA
Shares: Over 9% p.a. real return over 1881 – now!!!
Compare with house prices: ≈ 1% p.a. real
Full housing returns ≈ 8% p.a. real
Offer investors an opportunity to tailor their investment programs to meet
a steady stream of income or
for long-run accumulation of wealth.
There are shares to meet every investor’s objective.
*SHARE PRICE BEHAVIOUR
• The general behaviour of the market as a whole is reflected by the ASX All Ordinaries
Index and the ASX200 Index.
• Overall, shares provided average NOMINAL annual returns of around 14.4% over the 28-
year period 1983 to 2010.
• Annual nominal returns ranged from a low of -40.40% (2008) to a high of 66.8% (1983).
*SHARE PRICE INDICES
Indices are used to measure the performance of a particular group of shares (e.g. large
companies, small companies, mining companies, retail companies, etc.)
For comparison purposes indices are a collection of like companies formed into a portfolio
and the performance is measured by the index. Like portfolios’ indices are based upon the
company’s market value and how they contribute to the portfolio.
Australian Indices: All Ordinaries Index, ASX 200, ASX 50, ASX20, ASX small Cap Index.
International Indices: FTSE; Dow Jones; DAX; CAC; Hang Seng
*ADVANTAGES OF SHARE OWNERSHIP
High Return ( Disadvantage: High risk )
• Attractive, highly competitive returns over the long term.
• LIQUID (can be converted to cash quickly)
➢ Easy to buy and sell
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Topic 4 valuation of equity part ii- lecture 8. A financial instrument or asset represents a claim to future cash flows. Most financial assets fall into two broad categories: equity: represents ongoing ownership in a company. Most common type of equity is the ordinary share. (topic 4 part ii: debt: a loan that obligates the borrower to pay periodic interest and repay the loan amount at some future date. In the form of a share in a company known as dividends. Ordinary shares issued by a company which represent an ownership position for the. Shareholder has an entitlement to share in any distribution of profits of the company. Equity holders are not promised any dividends. The performance of an equity investment is tied to the success of the firm. Equity investment tends to be riskier than investments in debt securities. shareholder company may pay.
