B. Buying and selling shares

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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, such as New York and London, have a lot of requirements about publishing financial information for shareholders. Most companies use оver-the-counter (OTC) markets, such as NASDAQ in New York and the Alternative Investment Market (AIM) in London, which have fewer regulations.

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 exchange. This can change every minute during 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 customers place their buying and selling orders with a stockbroker: someone who trades with the market makers.

C. Going public

A successful existing company wants to expand, and decides to go public. The company gets advice from an investment bank about how many shares to offer and at what price. So the company gets independent accountants to produce a due diligence report. Then the company produces a prospectus which explains its financial position, and gives details about the senior managers and the financial results from previous years. The company makes a flotation or IPO (initial public offering). An investment bank underwrites the stock issue.

Read the text again and match the English collocations on the left to their Russian equivalents on the right.

1) part ownership of a company	a) получать фиксированный дивидент
2) stockholders	b) первичный рынок
3) securities	c) внебиржевой рынок
4) government bonds	d) долевое владение компанией
5) equity	e) номинальная цена акции
6) ordinary shares	f) зависеть от спроса и предложения
7) to receive a fixed dividend	g) акционеры
8) to go bankrupt	h) автоматизированные системы торгов
9) to go into liquidation	i) акционерный капитал
10) primary market	j) назначать цену
11) оver-the-counter (OTC) markets	k) прекратить существование
12) nominal value of a share	m) ценные бумаги
13) to depend on supply and demand	n) производить торги
14) automatic trading systems	o) обыкновенные акции
15)quote bid	p) государственные облигации
16) to sell at a profit	q) произвести выпуск новых акций
17)spread	r) размещать заявки о покупке и продаже акций
18)mark-up	s) сделать отчет по результатам комплексной проверки
19to place buying and selling orders	t) процентная надбавка
20) to produce a due diligencereport	u) обанкротиться
21) to produce a prospectus	v) гарантировать выпуск акций
22) to make a flotation	w)предоставлять проспект
23) to underwrite the stock issue	x) разница между доходностью акций

Read the text again and decide whether the statements are true (T) or false (F).

1. New companies can apply to join a stock exchange. (T/F)

2. Investment banks sometimes have to buy some of the stocks in an IPO. (T/F)

3. The due diligence report is produced by the company’s own accountants. (T/F)

4. The dividend paid on preference shares is variable. (T/F)

5. If a company goes bankrupt, the first investors to get any money back are the holders of preference shares. (T/F)

6. Stocks that have already been bought at least once are traded on the primary market. (T/F)

7. NASDAQ and the AIM have more regulations than the New York Stock Exchange and the London Stock Exchange. (T/F)

8. The market price of stocks depends on how many buyers and sellers there are. (T/F)

9. Automatic trading systems do not require market makers. (T/F)

10. Market makers make a profit from the difference between their bid and offer prices. (T/F)

Match the following words in the box with their definitions below.

bankrupt going public flotation liquidation prospectus preference shares stock exchange to underwrite market price investors primary market nominal value secondary market ordinary shares

1. a document describing a company and offering stocks for sale

2. a market on which companies’ stocks are traded

3. buyers of stocks

4. changing from a private company to a public one, quoted on a stock exchange on a stock exchange

5. the first sale of a company’s stocks to the public

6. to guarantee to buy newly issued shares if no one else does

7. shares that pay a guaranteed dividend

8. the most common form of shares

9. insolvent, unable to pay debts

10. the sale of the assets of a failed company

11. the price written on a share, which never changes

12. the marker on which shares can be re-sold

13. the price at which a share is currently being traded

14. the market on which new shares are sold

Make word combinations matching the two parts of the table. Then use the correct forms of the word combinations to complete these sentences below.

1) offer	a) an issue
2) go	b) a prospectus
3) produce	c) shares
4) underwrite	d) public

After three very profitable years, the company is planning to 1) ……….. 2) ……… and we’re 3) …………… 100, 000 4) ………… for sale. We’ve 5) ……………. a very attractive 6) ………….., and although a leading investment bank is 7) ……….. the 8) ……………., we don’t think they’ll buy any of the shares.

Discuss the following.

· Have there been any big flotations in the news recently?

· Are there any public companies whose stocks you would like to buy?

Financial Planning

Read the text and answer the following questions.

· What does financial planning involve?

· What does calculating discounted cash flow value mean?

· What does a company do if it wants to choose between possible investments in a new project?

A. Financial Planning

Alia Rahal works in the financial planning department of a large manufacturing company:

‘ Financial planning involves calculating whether new projects would be profitable. We have to calculate the probable rate of return: the amount of income we’d receive each year from the investment, expressed as a percentage of the total amount invested. If we're going to finance a project with our own money, the rate of return must be at least as high as we could get by depositing the money in a bank instead, or by making another risk-free investment, like buying government bonds.

If we need to borrow money to finance a new investment, its projected rate of return has to be higher than the cost of capital - the amount we have to pay to borrow the money.’

B. Discounted cash flows

‘We usually calculate the discounted cash flow value of an investment. This means discounting or reducing future cash flows to get their present values - in other words, calculating the present value of money to be received in the future. This is because the value of money decreases over time. Firstly, there’s nearly always inflation, so cash will have lower purchasing power in the future: you'll be able to buy less with the same amount of money. And secondly, if you had the money now, you could get income by using or investing it. The return we could get by investing the money in other ways is the opportunity cost of capital. So waiting for money is also a cost. This is the time value of money: how much more it is worth to receive money now rather than in the future.’

C. Comparing investment returns

'If we have to choose among possible investments in new projects, we work out the net present value (NPV) of each project by adding up all the expected cash flows, discounted to their present value, minus the initial investment. To do this, we have to select a discount rate or capitalization rate. This is usually the interest rate we pay for borrowing the capital, but we could increase it if there's a lot of uncertainty or risk.

Discounting sounds complicated, but it isn't. It’s the opposite of compounding interest. For example, if you invest $1, 000 at 10% for five years, it will yield 1.61 times its original value. So you get back $1, 610, including $610 compound interest. A discount rate of 10% has a discount factor of one divided by 1.61, which is 0.62. So $620 invested now will be worth $ 1, 000 in five years if it’s invested at 10%.

When we’re comparing alternative investments, we also calculate the internal rate of return (IRR). That’s the interest rate or discount rate that gives a net present value of zero in today’s money values. In other words, the present value of the cash that we’re going to receive from an investment is the same as the present value of borrowing that cash. We normally choose the investment with the highest IRR.’

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