Stock exchange ‹#› 2 Stock Exchange nA stock exchange is a corporation which provides facilities for stock brokers and traders to trade company stocks and other securities. nThe securities traded on a stock exchange include: nShares issued by companies nUnit trusts nOther pooled investment products nBonds nDerivatives, warrants etc. ‹#› 3 Stock Exchange nTo be able to trade on stock exchange, it has to be listed there. nNowadays trade is less and less linked to such physical place, modern markets are electronic networks, which gives them advantages of speed and cost of transactions. nTrade on an exchange is by members only. nThe initial offering of stocks and bonds to investors is done in primary market and subsequent trading is done in secondary market. ‹#› 4 List requirements nCompanies have to meet the requirements of the exchanges to have their stocks and shares listed and traded there. This requirements vary by stock exchanges. qLondon Stock Exchange: minimum market capitalization 700 000 pounds, minimum public float 25 % . qNew York Stock Exchange: issued at least million shares of stock worth 100 million USD and must have earned more then 10 million USD over last 3 years. PSE Market capitalization 1.000.000 EUR Volume of bond issuance 200.000 EUR Minimal public float 25 % Business activities 3 years ‹#› 6 Primary market trends nBull market qA bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of further capital gains. The longest and most famous bull market was in the 1990s when the U.S. and many other global financial markets grew at their fastest pace ever. qA bull market is also described as a bull run. ‹#› 7 The Charging Bull in Bowling Green, New York is a symbol of the bull market ‹#› 8 Primary market trends nBear market qA bear market is described as being accompanied by widespread pessimism. qInvestors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. q The most famous bear market in history was 1930 to 1932, marking the start of the Great Depression. q A milder, low-level long-term bear market occurred from about 1967 to 1983, encompassing the stagflation economy, q energy crises in the 1970s, and high unemployment in the early 1980s. ‹#› 9 Stock market crashes nWall Street Crash of 1929 nThe Crash of 1987 nDot-com bubble of 1995-2001 nA stock market crash is a sudden dramatic decline of stock prices. n Crashes are driven by panic as much as by underlying economic factors. nThey often follow speculative stock market bubbles. Theory of speculative bubbles nThe prices of securities, real estates or commodities tend to excess growth for time and after time without any acceptable reason. nThis excess growth is torn off suddenly and the prices are falling down sharply. nThese process when the prices of underlying are deviated from their balance level are called speculative bubbles. Theory of speculative bubbles nWhat is a reason of establishing and bursting out of speculative bubbles? nThere are three main explications of establishing of bubble: qMass psychology qTheory of noise traders qIneffectiveness of market Mass psychology nAccording to mass psychology the establishing of speculative bubble is started by some important event. nThe investors evaluate this event qmore optimistically qmore pessimistically n This excess evaluation implicates following oversize reaction of investors that because of wrong evaluation expected huge decline or growth of prices. nAs the next step investors start buy or sell of particular security that push its price up or down. Mass psychology nThe feelings in mass are infective and establish wave of optimism or pessimism is spreading and mass is converted in optimistic or pessimistic hysteria. nIn this situation the next investors are buying or selling securities because of clime in capital market. They seek behavior of other investors and continue in buying or selling because of their faith that prices of securities will growth (decline) in the future. nThe optimism (pessimism) is spreading through the mass and bubble is growing. nThe bubble is growing till exist the faith in growth or decline of prices that offer investors high capital revenue. Mass psychology nIn an instance when the mass loss faith in continue growth (decline) of prices the bubble bursts out. nAlthough that excess growth is dangers it is also lure for investors. In the phase when is clear that as established speculative bubble a lot if investors do not finish their participation in it. They are sure that before bubble bust out they get rich. nIf they are wrong in timing of bubble destruction they get heavy loss. Theory of noise trading nThe fluctuation of securities prices are caused of two type of investors existence qSophisticate investors qNon sophisticate investors nSophisticate investors qHave adequate information qAre able to sort out information to relevant and irrelevant according to their skills about capital market qThey are averse to risk it influences their investment decision and behavior qThis investors are also called as smart investors. Theory of noise trading nNon sophisticate investors qHave a lack of information qHave a lack of skills for investment analysis qAre known as a noisy trades nThe existence of noisy traders is a reason why there exists deviation of security prices from their balance level. nImbalance in capital market contribute to rise of system risk and smart investors are not able to avoid it. Theory of noise trading nBecause smart investors are averse to risk and in case of risk rising they limited their investment activities and they do not to help to return prices in their balance level. nThe securities prices are rising because of noisy trades activities. nIn effective market this deviation will be slight and should be eliminated in short time period by profit oriented investors. nIn the 1980’s and 1990’s there were introduces several phenomenon in capital market that are contrast with effective capital market. Theory of ineffective market nAccording this theory investors tend to overreact to every unexpected, new information. nOr investor overreact information that is not in way of particular security but that can have impact in security price according their opinion. nHistory of stock and commodity markets offers several examples that speculative bubble are not only theory but that they exist, growth and burst out. Tulip madness 1634-1637 nThe oldest example of speculative bubble. nTulips appeared in Europe in 1554. nIn the 17th century they became fashion item. nThe tulip demand was rising and their prices rising as well. nHolland was suffered by tulip madness. nTulip prices were pushed by speculation of aristocrats, traders with tulips or farmers. And tulips prices got exorbitant price. nTulips convert from flower to luxury item for speculation. nIn 1637 city Alkmaar sold 120 tulips in price 50.000 gold coins nAs sudden as tulip prices rose up they also collapsed in February 1637. nTill summer 1637 the tulip prices declined about 80-90 percentage. 800px-Tulip_price_index1 Great Crash of 1929 nThe Wall Street Crash was one of the most devastating stock market crashes in American history. nThis collapse has two phases Black Thursday (Oct 24 1929) – initial crash and Black Tuesday (Oct 29 1929) - the crash that caused general panic five days later. nThe collapse continued for a month but it was the catastrophic downturn of Black Tuesday that accelerated widespread panic. nSome consider that it was beginning of Great Depression, but most believe it was just one symptom rather than the cause. nGreat Crash caused qGDP decline (30% in USA) qGrowth of unemployment from 3% to 25 % (1929, 1933) qBankrupts of companies, banks and farms (100.000, 12.000.000 unemployment) Great Crash of 1929 nAt that time New York had grown to be a major capital and metropolis. nNYSE was the largest stock market in the word. nInitial impulses for starting of bull market in 1924 were follows: qUnderestimated securities qEnough free financial resources qDevelopment of companies that promises growth in company securities value nThe roaring twenties a time of prosperity and excess in the city, and, despite warnings of speculation, many believed that the market could keep high levels. nIrvin Fisher proclaimed shortly before crash: qStock prices have reached what look like a permanent high plateau. Great Crash of 1929 nDuring 1928 played important role in capital market psychological and political factors. qThere was almost 4 years long bull market – the faith of investors in continue of this trend qIn 1928 American president elected H.C. Hoover – supporter of strong regulation in capital market – the faith in “fair-play conditions in capital market nThe euphoria and financial gains of the great bull market were ruined on Oct 24, 1929, Black Thursday, when share prices on the NYSE collapsed. nIn days before Black Thursday the market was unstable. nPeriods of panic selling and high volumes of trading were interrupted by brief periods of rising prices and recovery. nInvestor got rid of securities for every price. Great Crash of 1929 nAfter an amazing five-year run that saw the Dow Jones Industrial Average increase in its value five times, prices peak at 381,17 (100 points in 1924) was reached on September 1929. nThen market fell sharply for a month, losing 17% of its value. Prices were recovered more than half of the losses over the next week. nThe decline was accelerated into the so-called Black Thursday (Oct 24). nA record number of 12,9 million shares were traded on that day. Great Crash of 1929 nAt 1 p.m. On Friday, Oct 25, several leading Wall street bankers met to find a solution to the panic and chaos on the trading floor. nThere was placed a bit to purchase a large block of shares in U.S. Steel at a price well above the current market. This tactic was similar to a tactic that ended the Panic in 1907, and succeeded in halting the slide that day. But the recovery was only temporary. nIn this project there were 6 largest bank every invested 40 millions USD. Great Crash of 1929 nOver the weekend, the events were dramatized by the newspapers across the United States. On Monday, Oct 28, more investors decided to get out of the market and slide continued with loss 13 % in the Dow for the day. The next day Black Tuesday was traded 16,4 million shares. nRockefeller family and another financial giants buy large quantities of stocks in order to demonstrate to the public their confidence in the market but this also does not stopped decline. nAfter Oct 28 market was closed till Nov 4 nAfter opening on Oct 4 investors that hesitated about sale started to sell. nMarket declined till the end of 1929 n The market loss 14 billion USD in value that day and continued to 30 billion USD loss for week, it means ten times more than the annual budget of the federal government and more that U.S. had spent in all of WWI. nAs late as April 1942, U.S. stock prices were still 75% below their 1929 peak and would not revisit that level until November 1954 almost a quarter of a century later. Great Crash of 1929 Great Crash of 1929 nThe crash followed speculative boom that that taken hold in the late 1920's which had led millions of Americans to invest heavily in the stock market, a significant number event borrowing money to buy more stock. nBy August 1929 brokers were routinely lending small investors more than 2/3 of the face value of the stocks that they were buying. There was over 8,5 billion of loans it. nThe rising share prices courage people to invest. Speculation thus fuelled further rises and creation an economic bubble. Czech speculative bubble nEstablishing and bursting out of bubble that was driven by exaggerate expectation of investors was also in the Czech Republic. n After renewal of operations in PSE in 1993 and starting trading with stocks form 1st and wave of voucher privatization. nIt evoked enthusiasm and optimistic expectations about possible revenues from stock trading. Czech speculative bubble nHigh demand of foreign and domestic investors about stocks evoked sharp increase in stocks prices in autumn and winter 1993/94. nBut speculative bubble was only short time. nAt the beginning of 1994 companies published their annual reports that were differ from expectations. nInvestors were disappointed and demand declined. nSpeculative bubble burst out and prices declined. ‹#› 32 Prague Stock Exchange ‹#› 33 Prague Stock of Exchange nPrague stock exchange was established in 1871. nInitially, both securities and commodities were traded at the Prague exchange. The Prague exchange enjoyed great success in the sugar trade, becoming a key market for the whole Austro-Hungarian Empire. ‹#› 34 Prague Stock of Exchange nAfter World War I, however, this type of transaction declined, so thereafter only securities were traded. n For the Prague exchange, the interwar period became the era of its greatest boom. n The Prague exchange even surpassed the Vienna exchange in importance. n This period of prosperity was, however, interrupted by the arrival of World War II, bringing an end to trading at the Prague exchange for more than 60 years. Not until after the fall of Communism was it possible to follow up on the exchange’s heritage of success and prosperity. ‹#› 35 1938 Stock exchange building in the pre-war period ‹#› 36 1938 Stock exchange interior in the pre-war period ‹#› 37 1938 Brokers on the trading floor in the pre-war period ‹#› 38 Prague Stock Exchange nThe Prague Stock Exchange opened its door to investors and issuers again in 1993. nThe Prague Stocks Exchange is the largest organiser of the security market in the Czech Republic and it is membership-based joint stock company. nIt means that only licensed traders who are also members of the Exchange have access to the trading system. nThe activity of PSE are supervised by the Czech National Bank. ‹#› 39 PSE Trading Data nThe Prague Stock Exchange publishes on its web pages, during the course of the Exchange day, a continuous stream of information on trading, with a delay of 15 minutes. nIn addition, on each Exchange day - after 5pm, there are published, on its web pages, the final results of trading i.e. the Official Exchange List. ‹#› 40 Markets of the Exchange nThe market of PSE is divided in several markets for better transparency of trading: qRegulated market – divided in official market with commercial instruments and special market with other financial instruments e.g. futures. nOfficial market is further divided in primary market, secondary market, free market and new market. qPrimary and Secondary markets are used for high volume of issues. The company trading in this market must continuously inform about their business. The trading in this market is prestigious for issuers. qFree market is used by companies that want trade their securities in the market but do not fulfil all prescribe conditions of primary or secondary market. ‹#› 41 Markets of the Exchange nNew market – no titles in this market. This market is determined for young, modern high tech companies but there are strict conditions for issuer. nBeside regulated (organized) market there is also unregulated market provided by PSE. qThe are no information disclosure duties and there is also possible to trade with securities without the issuer request. qThe condition for trading in unregulated market is publishing of commercial instrument prospectus. Important changes in Prague Stock Exchange in 2006 nIn March was indices PX 50 and PX-D replaced by general PX index. nBeginning of trade with investment certificates nBeginning of trade with futures nBeginning of trade with warrants nNowadays PSE trades with stocks, bonds, investments certificates, warrants and futures. ‹#› 43 System for support stock and bond market lSPAD is a system for support of stock and bond market. This system consists of the most liquid and most trading titles with the higher demand. lTheir aim is contribute to liquidity in the market. lSPAD is the most important segment of PSE. lIn this system there are trading only the most important securities and only in standard volume - lot or in its multiple. Initial Public Offering nIn the Czech Republic initial public offering usually does not function as a source of finance for joint stock companies. nThe absence of initial public offerings effected the structure and development of the Czech capital market. There were only 4 IPO in the Czech Republic qZentiva – 2004 qECM Real Estate – 2006 qPegas Nonwovens – 2006 qAAA Auto - 2007 qNew World Resources – 2008 (Prague, London, Warsaw) ‹#› 45 Exchanges Indices nPX Index: PX index is the official index of the Prague Stock Exchange. nThe PX index was first calculated on 20 March 2006 when replaced PX 50 and PX-D indices. nThe PX index took over historical values of the Stock Exchanges old index, the PX 50 and continues in its development. ‹#› 46 RM-System nSince 1993, the RM–SYSTEM has been active at the securities market as an organiser of off-exchange trading. nThe activities of RM-S have been authorised by the Czech capital markets regulator - the Czech National Bank. The Company is headquartered in Prague and is owned by FIO-credit bank. nSince December 2008 RM – Systém was transfered from the OTC market into Stck Exchange nRM-Systém index nSame securities as in the PSE nMain market + Free market nCEZ, Erste Group, Komercni banka, Philip Morris, Telefonica O2, Unipetrol n NWR, Pegas, VIG