3. Stock market quotations : Euronext vs Nasdaq 3.1. Euronext Paris main quotation rules

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1 3. Stock market quotations : Euronext vs Nasdaq 3.1. Euronext Paris main quotation rules Liquid shares Pre-opening at 7:15 am Opening fixing at 9: am Continuous quotation 9: am -5: pm Closing auction at 5:35 pm Illiquid shares Pre-opening at 7:15 am Fixing at: am Fixing at 4: pm Danone Ordinary stock Compartment A (large caps) Continuous /9/211 Pr. Didier Folus 1

2 Danone intraday quotes on February 22, 211 /9/211 Pr. Didier Folus 2

3 3.2. Euronext central orderbook fixing Pre-opening from 7:15 to 9: am Opening : XYZ stock Buy side Sell side Quantity Limit EUR Limit EUR Quantity 4 no limit no limit /9/211 Pr. Didier Folus 3

4 Quotation (electronic) rules : Price Quantities Cumul Max limits purchases sales supply demand min (S,D) no lim EUR EUR EUR EUR EUR no lim executed orders at 24 EUR non executed sales on the 24 EUR-limit 15 market interruption if quote varies % /9/211 Pr. Didier Folus 4

5 3.3. Euronext continuous time quotation Purchases Sales Last trades Quantity Limit Limit Quantity Time Quantity Quote :19 pm :19 pm :17 pm :16 pm :15 pm It s now 2:2 pm A stock 25.2 EUR limited buying order comes /9/211 Pr. Didier Folus 5

6 Continuous time quotation (continuing) Purchases Sales Last trades Quantity Limit Limit Quantity Time Quantity Quote :19 pm :19 pm :17 pm :16 pm :15 pm Matching orders /9/211 Pr. Didier Folus 6

7 Continuous time quotation (end) Purchases Sales Last trades Quantity Limit Limit Quantity Time Quantity Quote :2 pm :2 pm :2 pm :19 pm :19 pm Average price for 7 stocks : EUR Last quote : 25.2 EUR Last fluct. : +.4 % /9/211 Pr. Didier Folus 7

8 3.4. Index calculation : CAC 4 example Danone floating cap., Sep 27, 211 = 648,861, = EUR bn Security selection : first floating capitalization : Q i,t F i,t P i,t 4 most liquid : volume, turnover Capping factor at 15 % Index formula : CAC 4 Adjustment coefficient on Sep 27, 211 :, Index uses : diversification, benchmarking, hedging t 4 i, t i1 4 k t Q i1 Q F i, t i, P i, t P f i, t i, EUR 37,437,433,957.7 /9/211 Pr. Didier Folus 8

9 /9/211 Pr. Didier Folus 9

10 NCM Composite NSM Composite Nasdaq NGS Composite FTSE Nasdaq 5 Nasdaq Composite 3.5. Nasdaq stock market quotations Nasdaq segments (Dec. 2) In 1971, the National Association of Securities Dealers created the NASD Automated Quotations NASDAQ Stocks Indexes Related segments Registered with the SEC since 26 Global Select Market (# 9 companies) Nasdaq Options Market Global Market (# 1 4 companies) Nasdaq Portal Market Capital Market (# 5 companies) Nasdaq ETF Market /9/211 Pr. Didier Folus

11 Nasdaq structure of competing MM Each market maker competes for customer order flow by displaying buy & sell quotations for a guaranteed number of shares Example of a Level II screen : Microsoft Corp. (MSFT) / February 2, 29 / 3: pm EST (USD) Best bid : 18. Inside spread :. Best ask : 18.2 MMID Bid price Size Time MMID Size Ask price Time SBSH PERT UBSW FBCO REDI NATY GSCO , 2,5 2,5 7,5 8 5, 2,5 15:29:5 15:: 15:28:45 15:27:59 15:29:2 15:: 15:28:28 UBSW GSCO NATY FBCO REDI PERT SBSH 7,5 2,5 7 5, 5, 2,5 2, /9/211 Pr. Didier Folus 11 15:29:55 15:29: 15:29:45 15:27:59 15:29:2 15:28:59 15:28:4

12 4. Stock pricing & analysis 4.1. Fundamental analysis Industrial economy : pure and perfect competition zero profit imperfections positive profit Competitivity = ability to sell goods with profit : using best inputs, technologies, «know-how» using a mono/duopolistic position Strategy : objective : value creation choice : market share, internal/external growth, etc. /9/211 Pr. Didier Folus 12

13 Boeing Company : Charts & Financials /9/211 Pr. Didier Folus 13

14 Boeing Company : Consensus estimates /9/211 Pr. Didier Folus 14

15 4.2. Computing stock price using a DDM A simple DDM Gordon & Shapiro (1956) : Autofinanced perpetual growth g = ROI b Analysts forecasts Earnings per share. EPS t+1 = (1+g) EPS t Dividend par share D t = (1-b) EPS t Cost of capital k CAPM : E r r Er i i m r Market data Stock PV : V D1 1 k... D g D 1 1 D 1 k t 1 1 k k g t g /9/211 Pr. Didier Folus 15

16 Application & limits Boeing stock snapshot : Market & stock data : LT market return. E(r m ) = 8.5 % Risk free rate r = 3.5 % Boeing beta... = 1. Boeing dividend.. D = 1.68 USD EPS growth forecast g = 7 % k = % Theoretical value... V = USD /9/211 Pr. Didier Folus 16

17 A more sophisticated DDM Analysts forecasts concerning Boeing : D 1 = USD 2. D 2 = USD 2.5 D 3 = USD 3. from D 3 to D growth rate g = 6. % Formula : V D1 1 k D 2 D 3 D k 1 k 1 k k g 1 g Value : V = USD /9/211 Pr. Didier Folus 17

18 5. Factors that affect stock prices Economic growth : GDP Producers opinion Consumers sentiment Retailer sales Inflation : CPI Commodity prices Production prices Personal income Investors risk aversion V D 1 g k g Market efficiency : P vsv /9/211 Pr. Didier Folus 18

19 5.1. Key economic growth indicators Source : ECB, Sep 2. Purchasing Managers Index Institute of Supply Management Index of Consumer Sentiment University of Michigan Consumer Confidence Index Conference Board Retail Sales Index Cyclic stocks are sensitive to economic cycle /9/211 Pr. Didier Folus

20 Source : ECB, Sep Key inflation advanced indicators Commodity Price Index Bureau of Labor Statistics Production Price Index Bureau of Labor Statistics Personal Income Index Commerce Department All stocks are sensitive to Central bank policy /9/211 Pr. Didier Folus 2

21 5.3. Empirical risk premium /9/211 Pr. Didier Folus 21