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.