Why do stock markets move?

Fundamentals

______________

_____________

- inflation rate - company results

- ___________ - contract wins

- unemployment

Types of Investor

______________

______________

- ordinary people - ___________

-hedge funds

-investment banks

- _____________

B. Listen again and write T (true) or F (false).

1. The New York market was up today, but the London market was down.

2. A fall in interest rates will boost the stock market.

3. Analysts upgrade a stock because they want to attract buyers.

4. The share price tells you about the probable future profits.

5. Retail investors have the biggest influence on profits.

6. Hedge funds make about 30% profit per year.

Exercise 19. A. Discuss the following question:

Do changes in share prices affect people who don’t own any shares themselves? If “yes” in what ways does this happen?

B. Read the text and compare it with your answer.

Why Stock Markets Matter for You

Stephan Armbruster, BBC News online

The saying goes: “Don’t invest what you can’t afford to lose”.

But as stock markets fall, it is not just people who own shares who lose out. When the bears replace the bulls – in other words, when the market falls – it affects almost everyone because stocks and shares have become an integral part of almost all our financial lives.

There are a variety of ways in which stock market movements impact on our lives. The upbeat side of the growth in share ownership is that when the stock market goes up, consumers with shares feel richer, they borrow more and they spend more. But just as the stock market can go up, it can also go down. Usually the first to react to this are the institutional investors who are involved in the financial markets on a daily basis.

The internet boom is an example. Many personal investors felt they were burnt by the popping of the dot.com bubble. By the time they got around to selling shares in any number of failing internet based companies, the big City investors had already pulled out of the market. The institutional investors did not escape unharmed either. And the hits that they took also have an indirect, but potentially serious, effect on many people’s financial health. Any pain suffered by these institutional investors impacts on the returns paid on pensions, savings accounts or the interest charged on mortgages.

For individuals with a more direct interest – say day traders attracted by the tech boom – share holdings can be used as collateral to borrow money. But if the value and income from shares evaporate and the bank calls in the loan, the result can be big losses or personal bankruptcy. Meanwhile pensions linked to the stock market, like the ones being promoted by the UK government, are not immune. Unlike the state pension which is paid out at a rate set by the government, investing in a private pension indexed to the stock market can increase the value of the contributions dramatically, but they can also be erased.

Your job can also depend on the markets as companies use their valuation and the issue of new shares to raise capital to expand. If they are unable to do this then they have to find ways of increasing the company’s value to attract investors. The key tool they use is to cut jobs.

C. Mark the following statements T (true) or F (false).

1. Nearly everybody suffers the consequences when share prices go down.

2. Institutional investors are usually slower to sell when the market falls than personal investors.

3. The value of pensions paid by the government can go up and down with the stock market.

4. Companies can acquire new capital for expansion by issuing new shares.

5. Companies sometimes make people redundant in order to increase the company’s value (and its share price).

D. The phrases in the box have different meanings according to the situation they are used in. What meaning do they have in the text?

a) to lose money b) not to lose money

to be burnt	to suffer pain
to escape unharmed	to take a hit

E. Find phrases in the text that mean the following:

1.to sell all your stocks

2.to demand that a loan is repaid

3.to encourage people or companies to buy shares

4.to fire people

Exercise 20. An investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Usually the strategy will be designed around the investor's risk-return trade off: some investors will prefer to maximize expected returns by investing in risky assets, others will prefer to minimize risk, but most will select a strategy somewhere in between.

A. Discuss the following questions:

1. Do you think it is worth investing in shares? Or is it just “gambling”, like the lottery?

2. Which companies or sectors would you invest today? Why?

3. Which three of these strategies do you think could be the most successful? Why would they work better than the others?

1. I believe that it is best to invest in large international companies with strong brands. Small companies are just too risky.

2. If you want to invest in the markets, you should spread your risks by investing in several companies in different sectors. That way you reduce your exposure to any other company.

3. Watch the discussion boards for good stones about companies. Than “buy on the rumour, and sell on the news”.

4. The best way to invest in the stock market is to invest in a general fund, in which a manager decides which shares to buy or sell.

5. The only way to make money on the market is to invest your money for at least five years. Buying and selling quickly or day trading is just a way to lose your money.

6. Take Warren Buffet’s advice (the famous US investor): Be fearful when others are greedy and greedy when others are fearful.

B. You want to research a company to invest in. Work with a partner and make a list of four things you need to know about a company before you consider investing in it, for example

1.the share price;

2.___________

3._____-_____

4.___________

C. Your friend has recommended you to study the share price table prior to making a final investment decision. Look at the table below and match the labels in the table with the definitions 1-9. Put the correct numbers 1-9 in the spaces in the table. One of the items in the table doesn’t have a matching definition. Which one?

1. the number of shares traded yesterday

2. the percentage return you can expect to receive each year for investment in each share

3. the price you must pay for one share today

4. the total value of the company yesterday

5. the code you need to look up the shares online

6. if the share price increased or fell yesterday

7. the area of industry in which the company works

8. the relation between the earnings made by the company on each share and the current price of the shares

9. the highest price paid by investors for a share this year

(____) Sector: oil and gas

(___) Symbol	(___) Current price	(___) Change on day	(___) 52-week high	(___) 52-week low	(___) Dividend yield	(___) p/e Price / Earnings ratio	(___) Market cap. £UK	(___) Volume 000s
BP	450p	+23	657	347	4%	5.2	81 bn.	72,848

D. Using the information in the table, answer the following questions:

1. If you wanted to buy 200 shares in BP today, how much would it cost you? (Note in the UK share prices are quoted in pence so 100p=1£)

2. If you bought the shares at the lowest price for the year, how much did you pay?

3. If you sold the same shares today, how much money have you made?

4. If you bought 200 shares today, how much money would you expect to earn in dividends?

5. How many shares in BP were traded yesterday?

Exercise 21. You are going to research the share price performance of the IT company Microsoft.

1. Access the website http://www.nasdaq.com and enter the symbol msft that stands for Microsoft.

2. In the section “infoquote” find

   • the current share price. Is it up or down today?

   • the 52-week high and low of the price

   • the one year target price analysts expect it to reach

3. Use the charts section and look at the graphs. Find what has happened to the stock in the last 12 months? Has it gone up or down?

4. Find the “company news” section and find the latest reports from the company. Make a note of any important news announcements or product launches that may affect the share price.

5. Make a presentation of your findings in class.

Exercise 22. Role play the situation.

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 (or the equivalent in hryvnia) in them dividing the sum as you wish. Your client doesn’t particularly want to take risks.

Choose several blue chips as well as two companies that have only been listed 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. 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. Select a date to make a short presentation reporting on how well or badly the portfolio has done, and attempting to provide reasons or explanations for any price changes.