9.

Financial markets (the stock exchange, investment)

I. Introduction to the topic

The way the stock exchanges operate

The stock exchange is a highly organised market where securities are bought and sold.

The issuer offers the security for sale on the primary market. The investor can sell

the security any time on the secondary market. The over-the-counter (OTC)

market has been created for unlisted securities which are not traded on an organised

exchange. The fall and rise of prices respond to changes in supply and demand.

Blue chips are the shares of the best-performing companies regarded as safe

investments. The Hungarian index, the BUX contains the liquid shares of companies

with the biggest capital value. Fluctuations in the volume and the price of securities

traded on the stock exchange are important indicators of the state of the economy.

Securities
 A company can issue shares to institutional investors or the general public. Buying
a share through a specialist company or a broker gives its holder a stake in the
company. Shares generally entitle their owners to vote at the company’s Annual
General Meeting and to receive a dividend in proportion to their investment.
Ordinary shareholders with equities only get a dividend if there is enough profit.
Preference shareholders are entitled to get their fixed dividends before ordinary
shareholders.
 Bonds represent a loan for a fixed period with a fixed interest rate. They can be
either held till maturity or sold before maturity. Treasury bills are issued by the state
and represent a safe investment with a state guarantee. If a company wants to raise
money, it issues corporate bonds.

Portfolio
This is a set of investments made by an investor. A portfolio consisting mainly of bonds is
regarded as a low risk-level investment. The addition of shares to a portfolio of government
and corporate bonds increases the risk-level of the investment, but at the same time returns
can be higher.
Bulls and bears
Bulls are speculators who – anticipating a price rise (on a bullish market) – buy shares in
large quantities in order to sell them at a higher price later. Speculators who sell their
securities in the belief that prices are about to fall (on a bearish market) are called bears.

Vocabulary exercises based on the introductory text

A. Match each item in the left-hand column with one similar in meaning from the
list opposite
1. operate a. purchases made in order to gain profit
2. securities b. upward movement
3. fall c. financial investments, such as shares
4. rise d. give the right to (sy)
5. fluctuations e. relating to a company
6. stake f. part of the ownership of a company
7. entitle (sy) g. function
8. dividend h. wave-like motions, rising and falling
9. investment i. part of the profit of the company
10. corporate j. downward movement

B. For each item listed below, find in the text a word or phrase given in bold that
is similar in meaning

1. react ……………………
2. worth ……………………
3. agent who acts as a middleman, buying and selling
securities on behalf of others …………………….
4. corresponding to (three words) ……………………
5. amount paid for the use of borrowed money ……………………
6. time when a financial investment is due for payment ……………………
7. get, acquire ……………………
8. profits yielded ……………………
9. expecting ……………………
10. amounts ……………………

II. Hungarian text

Exercise 1
Cover the English words and expressions given on the right and try to guess the English equivalents
of the underlined parts of the Hungarian text..

Exercise 2

After checking your guesses against the list of equivalents on the right, give an oral summary of the
text in English.

DANUBIUS –Átértékeliki?

Világgazdaság 2007. április

Hosszú évek óta visszatérő témaii a magyar részvénypiaconiii a Danubius Hotels, s az

árfolyamában nem tükröződőiv értékes ingatlanállományv. A brókercégekvi korábbi
elemzéseivii nem ígértekviii nagyobb emelkedési potenciált, ugyanakkor az új
információk azt vetíthetik előreix, hogy a felülvizsgáltx modellekben már nagyobb súlyt
kap xi
majd az eszközalapú értékelésxii. Mindez jelentősebbxiii, akár 30 százalékos
árfolyam-emelkedéssel kecsegtetxiv.

Az átértékelődést elsődlegesenxv a lengyel szektortársxvi, az Orbis szárnyalásaxvii vetíti

előre. A vezetőxviii lengyel szállodatársaság részvényeinek félelmetes emelkedésétxix
(január eleje óta 50 százalékos ugrás) az indította elxx, hogy értékesítették az egyik nem
megfelelő kihasználtságúxxi szállodát, amely a könyv szerinti ingatlan értéknekxxii közel
háromszorosán kelt el.

A Danubius - az Orbishoz hasonlóanxxiii, eltérőenxxiv viszont a nyugat-európai

szektortársaktól- nem csupán szálloda-üzemeltetőxxv, de egységeinek több mint 90
százaléka saját tulajdonú ingatlanban működik. Az ingatlanok piaci értékexxvi a
nemrégiben napvilágot látottxxvii, hangsúlyozottan konzervatív becslésxxviii szerint
részvényenkéntxxix több mint 12 ezer forint lehet, ahhoz azonban, hogy e piaci érték
érvényesüljönxxx, néhány tényleges és sikeresxxxi értékesítésre lenne szükség.

Az új információt egy stratégiai döntésxxxii adja, amely szerint a Danubius - konkrét

határidőxxxiii né1kül- értékesíti négy alacsonyabb kategóriájúxxxiv szállodáját. Ezek
becsült értéke elérhetixxxv a másfél milliárd forintotxxxvi. A lengyel példából kiin-
dulvaxxxvii pedig egy ilyen tranzakció elegendő lehet arra, hogy a befektetőkxxxviii
figyelmét az eddig rejtve maradóxxxix ingatlanérték felé terelje, és meginduljon egy
részleges beárazódási folyamatxl. A hatalmas ingatlanvagyon beárazódása ellen hatxli,
hogy a társaság főtulajdonosa és menedzsmentje nem igazán elkötelezettxlii a pro-
 fesszionális ingatlanhasznosítás mellett. Ettől függetlenülxliii a befektetőknek érdemesxliv
a közeljövőben fokozott figyelemmelxlv követniük a Danubius-részvényekre vonatkozó
elemzői kommentárokatxlvi.
1752 n

III. English text

A looming challenge for the fund-management industry

The Economist print edition, Jan. 3rd, 2008

1. A lot of people would like to earn hedge-fund returns. But they are nervous about paying
the fees that hedge-fund managers like to charge, and about the risks those managers take.
2. That creates a great opportunity for those fund managers who can bridge the gap by
creating vehicles that might be described as hedge funds “lite”. Doing so has raised a host of
interesting issues, among them how to measure the skill, or alpha, of fund managers, and
what an index is really for.
3. The “lite” version of the hedge-fund industry includes products known as “130-30” funds,
which allow managers the limited use of hedge-fund techniques, such as going short (betting
on falling prices) and leverage (using borrowed money to enhance returns). The name stems
from the structure of the product; if the fund has $100m of assets, it will buy $130m of shares,
funding the difference by selling $30m of short positions.
4. Provided the manager has the ability to choose the right stocks to buy and sell, the product
should yield superior risk-adjusted returns. And theory suggests that giving the manager the
chance to short stocks allows him greater scope to put his skills into effect.
5. In a recent paper by Andrew Lo of MIT, he constructs a 130-30 index. Such a benchmark
would allow investors not only to see whether the 130-30 manager they hired is performing
well, but also to create low-cost, quasi-hedge funds of their own.
6. Mr Lo uses many factors to assess stocks, ranging from those based on valuation (the
ratio of the share price to sales) to business prospects (rising profits) and price patterns such
as momentum (shares that have performed well over the previous six months tend to keep
doing well). The index consists of long positions in the stocks with the best scores and short
positions in the stocks with the worst.
7. Nevertheless, investors have no guarantee that traditional fund managers (who also use
past performance as a sales tool) will perform as well in the future.
8. Skill, or alpha, is fast becoming a residual: the explanation that remains when all other
factors have been discounted. It’s still so hard for clients to distinguish skill from luck. But for
any thoughtful fund-management executive, it ought to be a long-term worry.

Important terms

hedge fund - an aggressively managed portfolio of investments with the goal of

generating high returns (via leverage, long, short and derivative positions)

index - a statistical benchmark that measures market performance. In the case of

financial markets, an index is an imaginary portfolio of securities representing a
particular market or a portion of it.

short position - selling a borrowed security, commodity or currency with the

expectation that the asset will fall in value (opposite of long position)

long position - buying a security such as a stock, commodity or currency, with the
expectation that the asset will rise in value.
leverage – using borrowed money to buy an investment in the hope of getting better
returns

risk-adjusted returns - measure of how much an investment returned in relation to the

amount of risk it took on

assessing stocks - the process of determining the current worth of stock on the basis of
various factors (valuation, rising profits, price patterns)

Extended vocabulary

 looming: threatening
 bridge the gap: overcome fears of investors concerning fund managers
 a host: a large number
 alpha: skill, cleverness
 enhance: improve
 stems from: originates from
 benchmark: standard against which the performance of a security, mutual fund or
investment manager can be measured
 residual: (here) the explanation that is left after all others have been ruled out; residual
assets are what is left of an estate after all debts, charges, etc. have been paid

Comprehension questions

1. What makes most people nervous about investing in hedge funds?

2. What is one of the vehicles or products hedge funds use and how does it work?

3. What does it mean to “go short”?

4. Whether or not the product yields good returns depends on what?

5. In what way does the 130-30 index serve as a benchmark for investors?
6. What are some of the factors used to assess what are the right stocks to buy and sell?

7. What is one way in which fund managers try to “sell” themselves to investors?

8. What conclusion does the article come to regarding the skill factor in relation to the
performance of a fund manager?

IV. Discussion questions

A. Discussion questions related to the text

1. What are some of the advantages and disadvantages of investing in hedge funds?

2. To what degree does a fund’s strong performance depend on alpha, that is, the skill of the
fund manager, or on just plain good luck?

3. Do you think that hedge funds are only designed to make very rich people even richer, or
are they also beneficial to society?

B. Additional discussion questions

1. What role does the stock exchange play in the economy? In what way is it important?

2. How would you compare the merits of bonds and shares for investing in?

3. Apart from securities, what forms of investment do you think would give reasonable
returns?

V. Role-playing exercises

17. Homeworking

Student:
You are the HR manager in a company that is planning to introduce homeworking. You have
been asked by a senior manager to outline the potential advantages and disadvantages of
homeworking for both the firm and its employees.

Examiner:
You are a senior manager in a company that would like to introduce homeworking. You
meet with the HR manager to discuss the advantages and disadvantages for both the firm
and its employees.
18. Offer of early retirement

Student:
You are a financial advisor. An employee has been offered a job-buyout package (early
retirement) by his/her employer, but is undecided whether to accept the offer, and if he/she
does, whether to accept regular payments or a lump sum. This employee comes to you for
advice.

Examiner:
You are an employee that has been offered an early retirement severance package from
your employer, but you’re undecided if you should accept this offer, and if you do, should you
accept regular payments or a lump sum. You ask your financial advisor for some insight.

i
revalue
ii
recurring topic
iii
stock market
iv
not reflected
v
valuable real estate portfolio
vi
brokerage firms
vii
earlier analyses
viii
promised
ix
anticipate
x
revised
xi
is attributed greater importance
xii
asset-based valuation
xiii
significant
xiv
holds out hopes of
xv
primarily
xvi
peer in the sector
xvii
soaring
xviii
leading
xix
dramatic rise
xx
triggered
xxi
under-utilised
xxii
book value of property
xxiii
similarly
xxiv
differently from
xxv
hotel operator
xxvi
market value
xxvii
recently published
xxviii
estimate
xxix
per share
xxx
prove effectual
xxxi
actual and successful
xxxii
strategic decision
xxxiii
deadline
xxxiv
lower-category
xxxv
amount to
xxxvi
one-and-a-half million forints
xxxvii
on the basis of
xxxviii
investors
xxxix
so far hidden
xl
partial pricing process
xli
works against
xlii
committed to
xliii
apart from this
xliv
worth
xlv
with increased attention
xlvi
commentaries on