ORGANISING AND FUNCTIONING OF SECURITIES MARKETS What are ‘Markets’? Efficient markets? Well functioning Information availability Volumes, prices Sharenet, JSE.co.za Liquidity and price continuity Numerous participants. Flow Transaction costs Friction External efficiency Numerous participants Information arrives randomly Competition to adjust

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Primary and secondary markets Primary IPO Prospectus Underwriting Private placements Secondary Financial market Liquidity Information – yields and prices

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Primary and secondary markets Secondary OTC Purely brokers Direct trading/Fourth market

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Market structures and organisation www.jse.co.za Five types of transactions Market orders Transact at prevailing prices Limit orders Specific prices Short sales Sale of shares not owned with intention of buying them back later at a lower price (risky) Shares are lent to the seller

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Five types of transactions Special orders Stop order loss or buys The stop buy is to minimise losses on short sales Margin transactions Borrows shortfall to buy shares with the share itself as collateral Higher interest rate

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Trading system STRATE Dematerialisation Continuous order driven system Odd lots SA Securities Markets BESA – Bond Exchange of South Africa SAFEX – South African Futures Exchange Indices, bonds, currency (FMD), Agriculture (SADD)

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS JSE – JSE Securities Exchange Ltd Main Board AltX Different listing requirements Table 2.1 Market Indices Aggregate market movement Use thereof

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Use of Indices Benchmark performance To create and monitor an index fund Market rates or return Prediction for the market itself Systematic risk relationship as a proxy Variables in the index Sample size Weighting Arithmetic or geometric average or one that reflects all changes

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Weighting Value Market capitalisation of all shares included Price weighted Index value = Total market index/Index divisor Total market index = market capitalisation Index divisor – ‘k factor’ Share splits, bonuses etc go through the k factor Equal weighting for all

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Bond market indices More difficult Bonds mature, new ones appear, different types of bonds Sinking or calls for example Duration affects volatility Difficult to price some compared to shares Indices All Bond Index (ALBI) Government Bond Index (GOVI) Other Bond Index (OTHI)

ORGANISING AND FUNCTIONING OF SECURITIES MARKETS Global view Must use a proper index for the proper decision Changes Negotiated commissions Meant to deal with ‘soft dollars’ and promote good broker advice Block trades Significant blocks of shares Volatility New exchanges and consolidations Increased automisation