The term ’securities’ refers to stocks, bonds and money market instruments.

• Stocks and shares are representing part ownership of a company. The people who own them are called stockholders and shareholders. In Britain, stock is also refer to all kinds of securities, including government bonds. The word equity or equities is also used to describe stocks and shares.
• The place where the stocks and shares of listed or quotes companies are bought and sold are called stock market or stock exchanges. A ’basket’ of stocks can be picket by a fund manager and put together into a mutual fund (UK: unit trust). Funds may invest in particular countries, or different sectors of the market, or may ’track’ (= exactly follow) a particular index. Each fund will have an investment objective, normally either regular income (from share dividends), or long-term capital growth (from an increase in the share price), or a balance between the two.

SHARES

• Ordinary and preference shares
• If a company has only one tpye of share these are ordinary shares.
• Some companies also have preference shares whose holders receive a fixed dividend (e.g. 5 % of the shares’ nominal value) that must be paid before holders of ordinary shares receive a dividend.

Holders of preference shares have more chance of getting some of their capital back if a company goes bankrupt – stops trading because it is unable to pay its debts.

If the company goes into liquidation – has to sell all its assets to repay part of its debts – holders of preference shares are repaid before other shareholders, but after owners of bonds and other debts.

If shareholders expect a company to grow, however, the generally prefer ordinary shares to preference shares, because the dividend is likely to increase over time.

• Buying and selling shares
  • After newly issued shares have been sold (usually by investment banks) for the first time – this is called the primary market – they can be repeatedly traded at the stock exchange on which the company is listed, on what is called the secondary market.
  • Major stock exchanges (= bourse), such as New York and London, have a lot of requirements about publishing financial information for shareholders.
  • Most companies use over-the-counter (OTC) markets, such as NASDAQ in New York and the Alternative Investment Market (AIM) in London, which have fewer regulations. A small selected group of stocks can be brought together to make an index. For example, the Dow Jones publishing organization compiles ’The Dow’ (an index or 30 large companies), and Stanford and Poor’s – a credit ratings agency – compiles dozens of different indices based on company size or market sector.
  • The nominal value of a share – the price written on it – is rarely the same as its market price – the price it is currently being traded at on the stock exhange. Thus can change every minute during the trading hours, because it depends on supply and demand – how many sellers and buyers there are.
  • Some stock exchanges have computerized automatic trading systems that match up buyers and sellers.
  • Other markets have market makers: traders in stocks who quote bid (buying) and offer (selling) prices. The spread or difference between these prices is their profit or mark-up.
  • Most customer place their buying and selling orders with a stockbroker – someone who trades with the marker makers.
• New share issues
  • Companies that require further capital can issue new shares. If these are offered to existing shareholders first this is known as a rights issue – because the current shareholders have the right to buy them.
  • Companies can also choose to capitalize part of their profit or retained earnings. This means turning their profits into capital by issuing new shares to existing shareholders instead of paying them a dividend. There are various names for this process, including srip issue, capitalization issue and bonus issue.
  • Companies with surplus cash can also choose to buy back some of their shares on the secondary market. These are called own shares.
• Categories of stocks and shares: Investors tend to classify the stocks and shares available in the equity markets in different categories.
  • Blue chips: Stocks in large companies with a reputation for quality, reliability and profitability. More than two thirds of all blue chips in industrialized countries are owned by institutional investors such as insurance companies and pensions funds.
  • Growth stocks: Stocks that are expected to regularly rise in value. Most technology companies are growth stocks, and don’t pay dividends, so the shareholders’ equity or owners’ equity increases. This causes the stock price to rise.
  • Income stocks: Stocks that have a history of paying consistently high dividends.
  • Defensive stocks: Stocks that provide a regular dividend and stable earnings, but whose value is not expected to rise or fall very much.
  • Value stocks: Stocks that investors believe are currently trading for less than they are worth – when compared with the companies’ assets.
• Investors

Stock markets are measured in stock indexes (or indices), such as the Dow Jones Industrial Average (DJIA) in New York, and the FTSE 100 index (often called the Footsie) in London. These indexes show changes in the average prices of a selected group of important stocks. There have been several stock market crashes when these indexes have fallen considerably on a single day (e.g. „Black Monday, 19 October 1987, when the DJIA lost 22,6 %).

Financial journalists use some annual names to describe investors:

• bulls are investors who expect prices to rise
• bears are investors who expect them to fall
• stags are investors who buy new share issues hoping that they will be over-subscribed. This means they hope there will be more demand then available stocks, so the successful buyers can immediately sell their stocks at a profit.

A period when most of the stocks on a market rise is called a bull market. A period when most of them fall in value is a bear market.

• Dividends and capital gains
  • Companies that make a profit either pay a dividend to their shareholders, or retain their earnings by keeping the profit sin the company, which causes the value of the stocks to rise. Stockholders can then make a capital gain – increase the amount of money they have – by selling their stocks at a higher price than they paid for them.
  • Some stockholders prefer not to receive dividends, because the tax they pay on capital gains is lower than the income tax they pay on dividends.
  • When an investor buys shares on the secondary market they are either cum div, meaning the investor will receive the next dividend the company pays, of ex div, meaning they will not. Cum div share prices are highter, as they include the estimated value of the coming dividend.

Case study: The history of dividends: The first dividend payments were made in the 17th century by the Dutch East India Company, which was the world’s first company to issue shares in exchange for capital. To encourage investors to buy shares, a promise of an annual payment (called a dividend) was made. Between 1600 and 1800 the Dutch East India Company paid annual dividends worth around 18 percent of the value of the shares.
The higher the company’s growth prospects, the greater the incentive to keep money within the business. Slow-growing companies should therefore pay out a high proportion of profits in dividends, whereas booming organizations are more likely to keep the cash within the business. There is no safer source of capital than retained profit: it does not need to be repaid, nor does it require the payment of interest. Another factor to consider is the health of the company’s finances. If they are weak, profits should be retained; only if the balance sheet is strong should generous dividends be paid to the shareholders.
Apple did not pay dividends from its formation in 1977 until 2013. The directors, led by Steve Jobs, argued that shareholders would benefit in the long term by allowing Apple to reinvest profits. Only in 2013, with its growth rate beginning to fall, did the company announce dividend payouts, which it projected would average $30 billion a year until 2015.

 Video 1: Dividend ratio

• Speculators
  • Insitutional investors generally keep stocks for a long period, but there are also speculators – people who buy and sell shares rapidly, hoping to make a profit.
  • These include day traders – people who buy stocks and sell them again before the settlement day. This is the day on which they have to pay for the stocks they have purchased, usually three business days after the trade was made. If day traders sell at a profit before settlement day, they never have to pay for their shares.
  • Day traders usually work with online brokers on the internet, who charge low commissions – fees for buying or selling stocks for customers.
  • Speculators who expect a price to fall can take a short position, which means agreeing to sell stocks in the future at their current price, before they actually own them. They then wait for the price to fall before buying and selling the stocks.
  • The opposite – the long position – means actually owning a security or other asset: that is buying it and having it recorded in one’s account.

Jun 1: Sell 1000 Microsoft stocks to be delievered Jun 4 at current market price 26,20 dollars

Jun 3: Stock falls to 25,90 dollars. Buy 1000

Jun 4: Settlement day. Pay for 1000 stocks at 25,90 dollars receive 1000 C 26,20 Profit 300 dollars

• Share prices

Influences on share prices: Share prices depend on a number of factors:

• The financial situation of the company
• the situation of the industry in which the company operates
• the state of the economy in general
• the beliefs of investors – whether they believe the share price will rise or fall, and whether they believe other investors will think this.
• Prices can go up or down and the question of investors – and speculators – is: can these price changes be predicted, or seen in advance? When price-sensitive information – news that affects a company’s value – arrives, a share price will change. But no one knows when or what that information will be. So information about past prices will not tell you what tomorrow’s price will be.

Predicting prices: There are different theories about whether share price changes can be predicted.

• The random walk hypothesis. Prices move along a ’random walk’ – this means day-to-day changes are completely random or undpredictable.
• The efficient market hypothesis. Share prices always accurately or exactly reflect all relevant information. It is therefore a waste of time to attempt to discover patterns or trends – general changes in behaviour – in price movements.
• Technical analysis. Technical analysts are people who believe that studying past share prices does allow them to forecast future price changes. They believe that market prices result from the psychology of investors rather than from economic values, so they look for trends in buying and selling behaviour, such as the ’head and shoulders’ pattern.
• Fundamental analysis. This is the opposite of technical analysis; it ignores the behaviour of investors and assumes that a share has a true or correct value, which might be different from its stock market value. This means that markets are not efficient. The true value reflect the present value of the future income from dividends.
• Types of risk: Analysts distinguish between systematic risk and unsystematic risk.
  • Unsystematic risks are things that affect individual companies, such as production problems or a sudden fall in sales. Investors can reduce these by having a diversified portfolio: buying lots of different types of securities.
  • Systematic risks, however, cannot be eliminiated in this way. For example, market risk cannot be avoided by diversification: if a stock market falls, all the shares listed on it will fail to some extent.

BONDS

• Bonds are loans to local and national governments and to large companies. The holders of the bonds generally receive fixed interest payments, once or twice a year, and get their money – known as the principal – back on a given maturity date. This is the date when the loan ends.
• Governments issue bonds to raise money and they are considered to be risk-free investment.
  • In Britain, government bonds are known as gilt-edged stock or just gilts.
  • In the US, they are called Treasury notes, which have a maturity of 2-10 years, and Treasury bonds, which have a maturity of 10-30 years. (There are also short-term Treasury bills, which have a different function.).
• Companies issue bonds called corporate bonds, because they can usually pay less interest to bondholders than they would have to pay if they raised the same money by a bank loan. These bonds are generally safer than shares, because if a company cannot repay its debts, it can be declared bankrupt. If this happens, the creditors can force the company to stop doing business, and sell its assets to repay them. In this way, bondholders will probably get some of their money back.
• Borrowers – the companies issuing bonds – are given credit ratings by credit agencies such as Standard and Poor’s and Mood’s. This means that they are graded, or rated, according to their ability to repay the loan to the bondholders.
  • The highest grade (AAA or Aaa) means that there is almost no risk that the borrower will default – fail to pay interest or to repay the principal.
  • Lower grades (e.g. Baa, BBB, C, etc.) mean an increasing risk of the borrower becoming insolvent – unable to pay interest or repay the capital.
• Bonds are traded by banks which act as market makers for their customers, quoting bid and offer prices with a very small spread or difference between them. The price of bonds varies inversely with interest rates.
  • This means if interest rates rise, so the new borrowers have to pay a higher rate, exsiting bonds lose value.
  • If interest rates fall, existing bonds paying a higher interest rate than the market rate increase in value.
  • Consequently, the yield of a bond – how much income it gives – depends on its purchase price as well as its coupon or interest rate.
• Types of bonds:
  • There are also floating-rate notes – bonds whose interest rate varies with market interest rates.
  • When interest rates are high, some companies issue convertible shares or convertibles, which are bonds that the owner can later can change into shares. Convertibles pay lower interest rates than oridnary bonds, because the buyer gets the chance of making a profit with the convertible option.
  • There are also zero coupon bonds that pay no interest but are sold at a big discount on their par value, which is 100 % and repaid at 100 % at maturity. Because they pay no interest, their owners don’t receive money every year (and so don’t have to decide how to reinvest it); instead they make a capital gain at maturity.
  • Bonds with low credit rating (and a high chance of default), but paying a high interest rate, are called junk bonds. Some of these are known as fallen angels – bonds of companies that were previously in a good financial situation, while others are issued to finance leveraged buyouts.

 Video 1: Bond duration

 Video 2: Zero coupon bond

 Video 3: Rogue Trader

1. 1. How Nick Leeson bankrupted Baring bank? And discuss the fraud triangle in this case.
2. 2. What are the weaknesses in Baring's internal control system?
3. 3. What changes can be made to its internal control system to avoid the collapse of Baring bank?

 Video 4: Wall Street 1

„Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”

1. Do corporate raiders like Gekko create anything useful? Do they make the economy more efficient?
2. Why is it illegal to engage in insider trading?
3. Are Americans more obsessed about making money than other people?
4. What did Gekko mean when he said to the stockholders of Teldar Paper that “greed is good”?
5. Near the end of the film, Gekko decided to sell Blue Star Airlines as quickly as possible when the union leaders told him they wouldn’t cooperate with him; What was the logical problem with this development in the plot?

 Video 5: Wall Street 2

 „You are all pretty much screwed. You do not know it yet, but you are the ninja generation. No income, no job, no assets. You’ve got a lot to look forward to. Someone reminded me the other day that I once said, greed is good. Well it appears greed is not only good, it is legal. We are all drinking the same cool-aid. But it is greed that makes my bartender buy three houses, he cannot afford with no money down. And it is greed that makes your parents refinance their 200,000 dollar mortgage for 250,000 dollars. Now they take that extra 50,000 dollars and go to the shopping mall so they can buy a new plasma TV, cell phones, computers and an SUV. And hey, why not a second home while we are at it. Gee Wiz, we all know the prices of houses in America always go up. Right? It is greed that makes the government of this country cut the interest rates to 1% after 9/11 so we can all go shopping again. They got all these fancy names for trillions of dollars for credit, CMO, CDO, SIV, ABS. You know I honestly think there are only 75 people in the world that knows what they are. But I will tell you what they are, they are WMDs. Weapons of mass destruction. When I was away, it seemed that greed, got greedier. With a little bit of envy mixed in. Hedge fund managers came home with 50 to 100 million bucks a year. So Mr. Banker, he looks around and says. My life looks pretty boring. So he starts leveraging his interest up to 40%, 50% to 100%. With your money not his. Yours. Because he could. You are supposed to be borrowing not them. And the beauty of the deal is no one is responsible. Because everyone is drinking the same cool-aid. Last year ladies and gentlemen, 40% of all corporate profits came from the financial services industry. Not production, not anything remotely to do with the needs of the American public. The truth is we are all part of it now. Banks, consumers they are moving the money around in circles. We take a buck, we shoot it full of steroids and we call it leverage. I call it steroid banking.

Now I have been considered a pretty smart guy when it comes to finance. Maybe I was in prison too long, but sometimes it is the only place to stay sane, looking out from the bars and say, hey is everyone out there nuts? It is clear as a bell to those who pay attention. The mother of all evil is speculation. Leverage debt. The bottom line is, it is borrowing to the hilt. And I hate to tell you this, but it is a bankrupt business model. It will not work. It is septicemic, malignant and it global. Like cancer, it is a disease. And we got to fight back. How we going to do that? How we are going to leverage that disease, back in our favor?”

1. What stood out as the main points in the movie?
2. What assumptions were embedded in the story?
3. What challenged you? What questions did it raise for you?
4. What biblical or theological themes come to mind that engage with the story?

 Video 6: Capital

Compare greed presented in Capital, Rogue Trader and Wall Street!