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FINA 313
Capital Markets
Chapter # 10
The Share Market
Tutorial 10
Questions: 1,4,9,11,15,19,23,27,
38 & 39

Question 1
Describe the three general functions performed
by secondary markets for equities.
It carries out price discovery. By revealing share
values, the market determines investors buying and
selling prices, it values the equity they hold as well
as the value of listed companies. Share price indices
reveal general movements in equity values.
The share market generates liquidity for listed
shares.
The market develops the pool of share investors.
Share markets also contribute to the economys
efficiency when market discipline results in the better
management of listed firms.

Question 4
What is corporate governance?
Corporate governance refers to the process of decision
making by a companys top management, and the
ways in which these managers are held responsible for
their management of the company.
It
involves
balancing
the
interests
of
the
manystakeholdersin a company - these include its
shareholders, management, customers, suppliers,
financiers, government and the community.
Since corporate governance also provides the
framework for attaining a company's objectives, it
encompasses practically every sphere of management,
from
action
plans
and
internal
controlto

Question 9
Distinguish between limit orders and at-market
orders and explain their relationship to a
markets depth.
A limit order specifies the amount of the security that a
trader wishes to buy or sell at a maximum buying or
minimum selling price. If unmet, limit orders remain stored
and displayed by the trading system unless they are
removed. They are the observed indication of a markets
depth since they show the number of shares that are
demanded and supplied and at what price.
At-market orders specify the security and the quantity to
buy or sell but the price is the best available (priority price)
from
markets
central limit order book. These are an
Marketthe
depth-meaning
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Question 11
Describe the settlement arrangements used by
the ASX.
Settlement is arranged by the markets clearinghouse
the Clearing House Electronic Sub-register System
(CHESS). Changes to ownership are recorded
electronically with settlement occurring in T+3 days.

Question 15
Describe the main dimensions of the share
Refer to data on the number of listed shares, the
market.
daily turnover, the markets
average transaction amount.

capitalisation

and

The ASX (as at May 2013):

had 2048 listed companies,
the average daily turnover in shares was $3.9
billion (which represents an annual turnover ratio
of 0.91),
the markets capitalisation was $1.46 trillion, and
the average transaction amount was $6265.

Question 19
How can we assess the liquidity of listed shares
and what general observations can we make
about the liquidity of ASX listed shares?
Liquidity can be assessed on the basis of turnover, bidask spread and price resilience. When distinguishing
between shares, higher liquidity would be reflected in
higher trading turnover, narrower bid-ask spreads and
greater price resilience .
When measured by turnover, liquidity in the share market
is much lower than that in the bond market. Within the
share market there are large variations between the
liquidity of listed shares, with relatively larger firms
(particularly the large-cap stocks) displaying much
greater liquidity than smaller firms (particularly those

Question 23
Explain how a market-capitalisation index is
calculated.
The main indices used by the ASX are market-capitalisation
indices. This type of index shows the impact on an index level
(over a base-period) resulting from movements in share prices
that are weighted by each companys
market capitalisation. The
level of the index on day t is:
t

Index

The numerator is simply the market capitalisation for each

company on day t summed for all the companies included in the
index. The denominator is the market capitalisation (aggregated
for all shares in the index) as at the base period. However this
divisor is adjusted for a range of reasons, such as when
companies in the index issue new shares or the companies
included in the index changes. These adjustments are required so
that the index reflects changes in share prices and not other
events.

Question 38
Describe the main features of a CFD and
explain their risk and return characteristics.
A contract for difference (CFD) is a contract between
a buyer and a seller, where the seller agrees to pay
the buyer the difference in the price of a traded asset
between the commencement of the contract and the
assets price when the contract is closed-out.
CFDs allow investors to profit from predicted price
increases (by buying a CFD) or price falls (by selling a
CFD) without the expense of trading the underlying
asset. The contracts can potentially result in large
profits or large losses, and so can be described as
high risk and return, or as a leveraged investment.

Question 39
39. Calculate the gross profit (or loss), before
interest and brokerage costs, to a CFD investor
who bought a CFD on 100 000 Qantas shares at
$3.10 and closed it out when the shares were (a)
$3.40, and (b) $2.90.
(a) 100 000 x (3.40 3.10) = $30 000 profit before
(b)100 000 x (2.90 3.10) = $20 000 loss before
interest and brokerage

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Thank
you

Question 27
27. Explain why a companys index market
capitalisation may differ from its market
capitalisation.
Free float refers to the proportion of a companys shares that
are freely available for trade in the share market. In broad
terms the ASX200 includes the share prices for the largest
200 listed companies (based on market capitalisation),
but its composition takes into account each companys free
float when arriving at its index market capitalisation.
Potentially a large company that has a small free float may
not be included in the index, or be given a reduced
weighting.
For example, around 10% of Telstra shares are held by the
Future Fund (a government investment vehicle) and so are
tied-up or unavailable for general trading. Telstras role in