I've been thinking about the share market

[steve_t]

Glad I didn't buy Burger Fuel at IPO. $1 a share has now gone to 38-50c a share. Doh

[avgas]

Glad I didn't buy Burger Fuel at IPO. $1 a share has now gone to 38-50c a share. Doh

Yeah I suspected as much. Apparently they couldn't get enough investors from that IPO either.........so the bank must be really riding them now.

[avgas]

http://business.scoop.co.nz/2011/08/...zealand-float/

heh seems they think the business is worth over $1B ($1.5B) cash.......
that return just gets smaller and smaller.

So yeah would be a small part of any portfolio I build if I were to invest. Makes me worry about the mums and dads out there though that will get told its a good thing, poor their savings into it only to find Trademe does not trade outside NZ.......

[steve_t]

Yeah, I saw that in the herald article. $500m for a 35% stake in it. Something tells me the shares are likely to follow the path of BurgerFuel but who knows? It'd be interesting to see the prospectus.

[Clockwork]

http://business.scoop.co.nz/2011/08/...zealand-float/

heh seems they think the business is worth over $1B ($1.5B) cash.......
that return just gets smaller and smaller.

So yeah would be a small part of any portfolio I build if I were to invest. Makes me worry about the mums and dads out there though that will get told its a good thing, poor their savings into it only to find Trademe does not trade outside NZ.......

So once that IPO money goes in to the company, is there any sense in which the company has increased in value by that amount or does it just become the property of the orignal owner as if, say I'd just bought 500 shares of company x off your good self?

Would the money raised be re-invested in the company?

[avgas]

So once that IPO money goes in to the company, is there any sense in which the company has increased in value by that amount or does it just become the property of the orignal owner as if, say I'd just bought 500 shares of company x off your good self?

Would the money raised be re-invested in the company?

Nah by the sounds of things this might be the other way around. IPO is selling a 35% stake in existing stock.
Money will be reinvested back into fairfax accounts.
Trademe hit saturation point about 3 years ago. So even if it was reinvested in Trademe unless they came out with something new the reinvestment would be a waste.

I can't wait for the 2030 govt bailout of Trademe.

[Clockwork]

If you were an interested investor could you find this sort of information out? Would such info be required to be in the prospectus or is there perhaps a phrase used to differentiate each sort of transaction? Because it seems to me that there's a pretty big difference and buyers really should know which sort of "investment" they are making.

[avgas]

If you were an interested investor could you find this sort of information out? Would such info be required to be in the prospectus or is there perhaps a phrase used to differentiate each sort of transaction? Because it seems to me that there's a pretty big difference and buyers really should know which sort of "investment" they are making.

Yeah usually its in the prospectus somewhere.

They pick their words wisely though. Look for key things like "step-out" "new plant purchases" or "redefine"....

But it easier to just look at the accounts if you know what your looking for. In this case its a no brainier. Fairfax has lost $400m, it has $700m tied up in an investment. It sells off a chunk of that investment for $500m...... the figures couldn't be anymore straight forward.

If you find a company that you are looking to invest in, I would be happy to look through the prospectus for you and point out any flaws for you. FYI don't even consider NZFSU or PGG..... I will tell you right now I have bad juju with them http://farrst.blogspot.com/2009/11/c...g-systems.html

[Banditbandit]

Another noob question but is a publicly listed company normally worth 20x EBITDA?

The value of a company has little to do with the share price

The value of the company is based on assets and income .. the share value is based on emotion and hope ..

http://business.scoop.co.nz/2011/08/...zealand-float/

heh seems they think the business is worth over $1B ($1.5B) cash.......
that return just gets smaller and smaller.

So yeah would be a small part of any portfolio I build if I were to invest. Makes me worry about the mums and dads out there though that will get told its a good thing, poor their savings into it only to find Trademe does not trade outside NZ.......

yeah .. at $1.5billion it's not a great return ... I certainly would not be buying ..

So once that IPO money goes in to the company, is there any sense in which the company has increased in value by that amount or does it just become the property of the orignal owner as if, say I'd just bought 500 shares of company x off your good self?

Would the money raised be re-invested in the company?

Yes, no, maybe ..

In this case the money is going to offset Fairfax losses ...

In some cases, if a company can convince investors it intends to put it back into the company then yes the value can increase, especially if it buys assets which earn money ... but only if you buy into a new shqre float ...

If you buy shares off another investor then the company does not see the money ... you purchase the seller's investment ...

The value of a company seems to depend on two things - and they seem to be independent. One is what the company would realize if the company was wound up ansd the assets sold and all the liabilities paid off. The percentage of your shareholding would entitle you to that percentage of the money left over ... (shareholders are not preferential creditors). Tied in with this concept of value is also the "return on investnment" i.e. how much dividend is paid out each year ..

The other value is what people THINK the company is worth - reflected by the share price - which is what pundits call "driven by sentiment" .. in other words, emotions - hope, despair, panic, elation, wars, droughts ... etc etc ...

Investors go generally go with the first value - traders with the second ..

Have a look at Bird and Fortune ... for a very funny and pretty close to the truth discussion ..

http://www.youtube.com/watch?v=mzJmTCYmo9g

[Robert Taylor]

I'm not too knowledgeable about it but I've been trying to reason it all out and this is what I've come up with. Would welcome feedback from those more experienced in these matters.


So lets assume I own a business and I want to expand that business, I see an opportunity to increase market or productivity but I need finance to do it. The best option would be provide the finance myself (as the owner) but assuming that I personally don't have the funds I can go to a bank for a loan or I can "float" the company and allow others to buy a piece of my action.

I'd need to start by determining what the company is worth, adding up the sum of its assets/liabilities and taking in to account its operating costs, turnover, profit history and projected profit forecasts some sort of financial whiz presumably can determine what the total value of the company is. An investor comes along with the necessary funds and agrees to buy into the business and receives a shareholding equivalent to the investment made.

The money invested is put to use as required and the company's value raises initially by the amount invested plus some arbitrary amount based upon the expected returns to be made and the desirability of the shareholding to non-investors. This in effect is reflected in the company's new share price.

Once the company's shares start being traded, future owners aren't actually investing in the company at all they are merely speculating that the dividends paid or the increased desirability of the shares will provide sufficient return to justify their ownership.


Now we hear a lot about how it's important for the economy to have a healthy share market and the Government would encourage savers to participate but it seems to me that what they are really asking us to do is speculate our money by buying and selling shares, which doesn't in itself actually go to the companies being traded and is not used to further expand their markets or productivity. As such the companies aren't actually worth any more and neither is the nation's economy nut as more investors enter the market, the finite number of shares will increase in value simply by the laws of supply and demand.

It appears to me that the only people benefiting from such a market are the astute speculators and the Brokers and Dealers, if and when additional money stops coming into the market and supply starts to exceed demand the share values will drop. The dealers will continue to make money but the share holders will see the share value start to decline below what they paid for the shares. They are in effect the looses in this. The companies trade on, paying their dividends etc... but many poor saps will have bought at speculatively high price and in effect will find themselves at the end of some sort of pyramid trading scheme where the dividends really don't match the return they should expect for the money they paid (note, I wont use the term invested because no real investment was actually made.)

The way I see it, this sort of share speculation serves no productive purpose for an economy. Maybe the Government should look to reform the share market to encourage more "Investment" rather than speculation. It occurs to me that one way to do this may be to reduce taxes paid on dividends and increase taxes paid on capital gains through trading rather than capital gains through "investing"

Also, when a company does want to invest to increase its profitability how often does it tap it's share holders on the shoulder and say "hey bud, how about stumping up your share in the capital needed for this investment" rather than running off the nearest bank. If you can't ante-up get a loan or sell your shares to someone who can.


Following this line of reasoning I can not see what productive purpose is achieved through share trading, can someone please enlighten me? Like I've said earlier, I have no formal knowledge of this business and I know there are some real Brains Trusts that contribute to this board so I'd love to hear critique or suggestions from those wiser in the ways of the share market.

Simplistically, I loathe brazen speculation as it arguably does little productive other than for the recipients bank balance. I think the ''money supply'' is best used for companies that do something productive for the countries economy and in doing so carry along people with it by employing them. We need more engineers doing something thats actually useful and....ethical.

[p.dath]

Every "investment" involves some "speculation". Basically the higher the risk the greater the return.

You put your money in the bank based on the assumption that they will eventually pay you back out plus some interest. The risk is low - but there is a risk of default.

You invest your money in a publicly listed company. You do this based on what you expect the future sale price to be, or for dividend. The risk is higher, but the return is better.

You invest your money at the casino. This is based on what the return will be if you win. The risk is very high, but the return is much greater again.


When people invest they need to weigh up the risk of loosing their investment, against the possible future return.
The good thing about investing in companies is that it helps the economy grow, helps us produce more as a country (hopefully for export) and creates new jobs.

[Winston001]

Just to add to Bandits excellent post:

The share price is the future (estimated) value of the company.

The price paid for a company share consists of three things:

• The breakup value of the company = dollars per share

• The dividend payout compared to putting your money in a term deposit

• The future earnings of the business

It's this third point which leads to huge gaps between different company share prices and is where sentiment intervenes - fear, excitement, yawn...

Solid boring businesses should trade on a PE (Price/Earnings ratio) of 14. Declining businesses maybe 8. But those aren't the shares you hear about on TV. Of course not, it's the others, the sexy exciting expanding noisy companies who are THE NEXT BIG THING. Like technology company Rakon. Which I bought at $4. And now trades at $0.79.

The exciting shares typically trade on PEs of 30 or more. Pan Pacific Petroleum is 63 which tells us there is a lot of optimism - and risk in the price. By comparison Goodman Fielder are a dog (against all business logic - they should mint money) and have just made a big loss. The PE is 8.

Dot com companies can trade on PEs in the 100s because the buyer hopes the business will break through and be mega successful. There is always another Microsoft somewhere. I'll sell you one, go on, trust me, in fact I'm sure RAK.NZ is worth $5 between you and me...

[avgas]

We need more engineers doing something thats actually useful and....ethical.

I wish this were the case. But in my field I can honestly tell you that behind (almost) every ethical is 2-3 manager, and a board of directors and shareholders that are only in it to get a buck.
Don't even get me started on groups like EEA and IPENZ.......I wouldn't even save those sods in an earthquake. From recall the head's of both are accountants.

The NZ market has crushed many an engineers dreams of humanity in the last 20 years. I had to take the philosophy of if you can't beat em at your game, change to theirs.

To any engineering students and graduates out. Don't feel disheartened with what I have said - there is lots of good elements too. And if you get a good boss in a good company (1%ers) you will be fine.

[avgas]

Dot com companies can trade on PEs in the 100s because the buyer hopes the business will break through and be mega successful. There is always another Microsoft somewhere. I'll sell you one, go on, trust me, in fact I'm sure RAK.NZ is worth $5 between you and me...

It is. If $NZ1.00 = $US0.10

Or they invade Iran.
Its funny though - there was an article recently that basic said RAK investors were blind to the (bad) facts mentioned in the books.

Mind due did'nt help when Navman got sold off and stopped buying their chips. Then samsung. Then Foxconn........

[Clockwork]

Every "investment" involves some "speculation". Basically the higher the risk the greater the return.

You put your money in the bank based on the assumption that they will eventually pay you back out plus some interest. The risk is low - but there is a risk of default.

You invest your money in a publicly listed company. You do this based on what you expect the future sale price to be, or for dividend. The risk is higher, but the return is better.

You invest your money at the casino. This is based on what the return will be if you win. The risk is very high, but the return is much greater again.


When people invest they need to weigh up the risk of loosing their investment, against the possible future return.
The good thing about investing in companies is that it helps the economy grow, helps us produce more as a country (hopefully for export) and creates new jobs.

Sorry, p. I don't think you've been comprehending my point. What you've just described is gambling not investing. Its even the analogy you used!

....
The good thing about investing in companies is that it helps the economy grow, helps us produce more as a country (hopefully for export) and creates new jobs.

My contention has been that simply trading shares does none of this! I've even asked people to dispute this position, but I don't recall seeing a convincing argument to the contrary.

In the absence of such we've simply got to stop repeating this mantra. I believe we need to differentiate between investing (productive money for a productive purpose, which, yes, does involve a form of speculation) and just "investing" by buying some shares in the hope that the dividends/capital gains provides a worthwhile return.