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					Shares
An Introduction
            What are shares?

• Shares    =     stock    =   equity
                 bonds
• represent part ownership of a listed company
• (share)holders entitled to a a ‘share’ of
  company profits
• profits shared out as dividends
• (share)holders entitled to vote on how the
  company operates
          Benefits for investors

• Voting happens annually at the AGM:
   – on who is the directors
• Benefits for investors of shares:
   – capital growth and
   – income
   – ‘liquidity, because:
   – shares are comparable
   – buyer or seller knows exactly what they are
     buying or selling.
            Return and prices

• Shares usually provide a higher return on
  investment than any other major class of asset
  over the medium to long term
• share price of one company’s shares reflect its
  year-to-year performance,
• share prices overall affected by general
  economic conditions and market sentiment
• Historically, been a strong upward trend in the
  value of shares on Stock Exchange
            Tax effectiveness

• One of the major attractions of investing in
  shares is its tax effectiveness.
• tax has already been paid by the companies
  enabling some clients to effectively receive
  their dividends tax free.
 The importance of diversification

• Good financial advisers recommend clients
  invest in a number of areas or asset classes to
  offset risk of incurring substantial loss, or
  receiving insufficient return in any one area.
• Diversifying investments across number of
  areas = reduced risk of losing money.
• Most financial advisers recommend share
  investment as a way of creating a diversified
  portfolio.
                Quick check 1

• Are the following statements true or false?
   – Your clients should invest in a single asset class
     to reduce risk.      True?
                          False ?

   – Balanced portfolios usually include investments
     in shares.           True?
                          False?
            Listed companies

• Company = legal entity, distinct from its
  managers and employees and owners.
• There are many private or proprietary
  companies, ranging from small family
  businesses to large privately owned
  conglomerates,
• Companies listed on the share/stockmarket
  must be public companies.
    public limited company (plc)

• A public company is only type of company
  permitted to raise money directly from public.
• no restrictions on maximum number of
  shareholders.
• must be certain minimum number
              Quick check 2

• Are the following statements true or false?
• Companies listed on the London Stock Market
  are public companies.     True?
                            False?
• A public company is restricted to 1,000,000
  shareholders.              True?
                             False?
              Keeping track

• One advantage of shares is the ease with which
  you can keep track of them.
• For example, regardless of whether or not you
  use an Internet broker, you are able to get
  share prices online.
• One source is stockmarket websites.
           Technical analysis

• Technical analysis is a way of examining
  potential share investments.
• There are some simple technical techniques
  that can quickly assist your investment
  decisions, but to become highly competent in
  any type of analysis can be difficult.
                    Trend

• There is an old market adage that says 'the
  trend is your friend'.
• This is an important statement because it
  defines what much of technical analysis is all
  about.
• Especially when you are looking at short term
  ventures, the trend of a particular stock may be
  all you need to identify whether or not you or
  your clients should buy it.
        Pictorial Representation

• Much of what technical analysis focuses on is
  pictorially reflecting the emotions of the
  market place.
• argument is that all buying, selling, rumours,
  statistics and even inside information is going
  to be ‘factored’ into price of a share as people
  act on that information.
• By looking at prices, you can see whether there
  is buying that would result in rising prices.
             Observing prices

• You know if bad news has come out, or if it's
  expected to be released, because sellers will
  come into the market and push prices lower.
• Proponents of charting and technical analysis
  suggest that, by observing the prices, you don't
  need to look at anything else.
                    Charts

• Charts simply reflect all the available
  information at any given time.
• If someone has information that no one else
  has and they act upon that information, they
  will affect the price and it will move to a new
  level, ‘factoring in’ that information-based
  activity.
• Charts can’t predict the future.
• always so-called 'experts' getting it wrong.
                 Charting

• You can, however, use some simple charting
  techniques that may assist in the development
  of a worthwhile strategy, by giving you an
  insight into the underlying sentiment in the
  market.
         Random Walk Theory

• Many academics are Random Walk Theory/ists
• that technical analysis is waste of time;
  activities in the market are random and
  unpredictable.
• past movement/direction of a share price
  cannot be used to predict the future movement
• believes share price changes are independent of
  each other, have same probability distribution,
  but over time maintain an upward trend.
            Human behaviour

• Humans trading in shares determine market
  movements.
• But human behaviour is far from random.
• Quite often, investors will take on a herd
  mentality.
• By examining trends in trading (via charts),
  you will be able to determine which way
  shares are trending and hopefully (if only for
  the short term) join the herd and make a profit.
            Pundits’ advice...

• Must make own judgement but don't sacrifice
  better market returns because market pundit
  says charting is not worthy of your attention.
• By incorporating both other and technical
  analysis into your investment strategy, you will
  be able to ascertain both what a share is worth
  (fundamental), and what worth the market
  places on it (technical).
                    ‘Bar’ charting




Bar charts are often used to analyse price action. Each bar takes
information from a day's trading and plots it as above.
              ‘Bar’ charting 2

• On right side of diagram is single day's bar.
• ‘left’ tab represents opening price, tab on right
  side represents closing price.
• top point of bar represents highest high, and
  bottom point represents lowest low.
• plotting each day's bar consecutively on a
  chart, picture develops to help illustrate
  interplay between supply (sellers) and demand
  (buyers).
             ‘Bar’ charting 3

• it is as easy to draw a daily bar chart as a
  weekly chart with bars that capture the opening
  price on Monday, the highest high and the
  lowest low during the week, and finally the
  closing price on Friday afternoon.
• We can also construct, say, monthly bar charts
  or even 1-minute bar charts in a similar way.
              Quick check 3

• Are following statements true or false?
• bar shows opening price, closing price, highest
  high and lowest low.       True?
                             False?
• Bars can be plotted consecutively on a chart.
                              True?
                              False?
• Yearly bar charts can be plotted. True?
                                    False ?
                   Downward trend
First, define 'trend’: period when price moving more in one direction.
                    Upward trend
Below: the price is moving in an upward direction.
               Quick check 4


• Is following statement true or false?
• A trend is a period when the price seems to be
  moving more in one direction than the other.
      True ?
      False ?
              Defining trends

• Establishing direction of the market or stock
  by determining if it is in an uptrend, downtrend
  or not in a trend
• can simplify the process of sorting through
  myriad of markets and stocks,
• enabling a search for the best opportunities.
• It should also save time: determining the trend
  is objective and can be established at a glance.
          Defining an uptrend

• a trend in which the share price is rising.
• a 'friendly' environment to be owning shares.
• Assuming not using derivatives or short-selling
  techniques, you make capital gains from rising
  prices and are most interested in isolating these
  upward trends.
          Defining an Uptrend




• Diagram shows it is easy to define an uptrend.
Defining an Uptrend
• each subsequent high is higher
  than the previous high,
• each subsequent low is also
     higher than previous low.
• This is how an uptrend is defined.
• Must have higher highs AND higher lows.
• If not, you do not have an uptrend.
• You might not have a downtrend either.
         Defining a downtrend
• The diagram to the right describes a
  downtrend.
• Definition of a downtrend is a series
  of lower lows AND lower highs.
• Each high is lower than the previous
     one and each low is lower than the
     previous one.
• BUY: only when an uptrend emerges
• SELL: only when a downtrend develops
       Neither an uptrend nor a
              downtrend
• Markets, however, not as simple as diagrams
  above, and there are periods when market is
  neither in an uptrend nor in a downtrend.
• In the next diagram, prices never reach a point
  where there is a series of higher highs AND
  higher lows.
• There is neither an uptrend nor a downtrend;
  market is merely trading sideways with little
  indication of clear direction.
            Trading sideways

• There are technical analysis
  tools available to assist
  trading in a sideways
  trending market.
• Without these tools, a
  ‘sideways trending’ market
  represents a time to stand
  aside and do nothing.
              Quick check 5

• Are following true or false?
• A series of higher highs and lower lows
  defines an uptrend. True?        False?
• You should buy uptrending shares.      True?
                                         False?
• A series of lower highs and lower lows defines
  a downtrend.          True?      False?
• You should buy downtrending shares. True?
                                      False?
              Quick check 6

• Share prices often exhibit neither an uptrend
  nor a downtrend.      True?
                        False?
• Without the right tools, you should stand aside
  when the price is neither uptrending nor
  downtrending.         True?
                        False?
     Nothing works all the time

1 You might buy a share as it uptrends.
2 However, we are not aware of what the future
  holds.
3 The share could simply drop back in price.
  This may happen to you many times before
  getting it right. So...
    Let your profits run and cut your losses.
    Nothing works all the time...

• This adage has stood the test of time.
• Each time a share goes the wrong way, need to
  get out again. It is better to take a small loss
  now than a bigger one later.
• A successful analyst may get it wrong many
  more times than they get it right, but because
  the losses are kept small, the fewer but much
  larger winning trades outweigh the collective
  losses.
                  Resources

• There is a wealth of resources available on the
  Internet to help you with technical analysis.
• For example, explore the following websites:
    BigCharts:     www.bigcharts.com
    Guppytraders Essentials:
     www.guppytraders-essentials.com
    Incredible Charts:
      www.incrediblecharts.com.au
                  Beware...

• Technical analysis is useful tool to help you
  ‘time’ your entry into the market.
• can add some comfort to work already
  conducted or be used as a stand-alone method.
• Is a great deal more that technical analysis has
  to offer, but road is laced with mistakes that
  have all been made before.
• Be sure to seek advice from those spent many
  years testing and developing robust methods.
                         Any Questions
Taken from: Website of Financial Planning Association of Australia (FPA). In
particular, information from the following webpages has been taken, adapted or
amended:

FPA: Shares . Web address:
http://www.fpa.asn.au/cpd_online/demo/utsm_shares_menu.asp

FPA: Technical analysis. Web address:
http://www.fpa.asn.au/cpd_online/demo/utsm_techanalysis_menu.asp

Please appreciate that copyright is no doubt maintained by the FPA. If quoting,
please visit relevant website, please quote correctly and give credit to those to whom
it is due.

				
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