Rights issues

So, what’s this all about? Are things changing? Is it a load of bear or a load of bull?

Published on: 15 Aug 2013

The major stock markets around the world have been bear markets for the last couple of years but with the end of the recession looking like it’s here we should soon see a switch to a bull market.

Analysts around the world will be arguing one way or another on the timing of the recovery but where do the terms “bear market” and “bull market” come from?

There are two main views on the origin of these terms.

The first view is based on the methods with which the two animals attack.  A bear for example will swipe downwards on its target whilst a bull will thrust upwards with its horns. A bear market therefore is a downwards market with declining prices whilst a bull market is the opposite with rising prices.

The second view on the origin is based around the “short selling” of bearskins several hundred years ago by traders. Traders would sell bearskins before they actually owned them in the hope that the prices would fall by the time they bought them from the hunters and then transferred them to their customers. These traders became known as bears and the term stuck for a downwards market. Due to the once-popular blood sport of bull and bear fights, a bull was considered to be the opposite of a bear so the term bull market was born.

Whatever the actual origin of the terms though I’m sure most people will be relieved when we return to a bull market.

Are the young ones always smaller?

Published on: 18 Nov 2011

I’m willing to bet that nearly all of you have used a Microsoft product. Probably an equally high proportion have used Google and a reasonably significant number of you will own an Apple product.

What about LinkedIn? Most of you have no doubt heard of it and a number of you will be registered with the website.

But did you know that Microsoft currently has one of 9.40, Apple has one of 13.61, Google has one of 20.30 and LinkedIn has one of well, … well, you’ll just have to wait a moment to hear the figure as it’s rather impressive.

So, what figures am I talking about?

The figures mentioned above refer to the PE ratio or the Price Earnings ratio.

In an attempt to astound you with my knowledge, the Price Earnings ratio measures… (wait for it)… the ratio of Price to Earnings (a round of applause please for that brilliant explanation).

In other words, the share price of Microsoft for example is such that the market is currently prepared to pay 9.40 times the earnings to own it.

The PE ratio is also sometimes known as the “price multiple”, “earnings multiple” or simply “multiple” and whilst share prices can be affected by a number of different things, a high PE ratio generally implies that the market is expecting earnings to rise in the future.

If we round up the PE ratios of the companies above we get:

Microsoft: 9

Apple: 14

Google: 20

That other tech giant on the market, LinkedIn currently has a PE ratio of 1,498 (yes, 1,498).

Wow – that’s not bad is it?

So hang on. A PE ratio this high implies that the market has factored in an expectation of significant growth in earnings for LinkedIn.

This really is an expectation of pretty significant growth as at the moment for every $1 of current earnings an investor gets he or she has to pay $1,498.

So, for the sake of the LinkedIn shareholders let’s hope that in the future more people become linked in.

The Biggest Rights Issue in UK history

Published on: 29 Nov 2009

F9 and P4 students should be aware that there are a variety of ways to raise finance (see chapter 4 of our free F9 ExPress notes. One method is by way of a rights issue where a company issues new shares and sells them to existing shareholders. Shareholders are not obliged to buy them but merely have the “right” to buy them. By being given the “right” they have the security of knowing that their shareholding won’t be diluted by shares being issued to other shareholders without first being offered them.

The Lloyds Banking Group has recently announced the UK’s largest ever rights issue and the bank hopes to raise over £13 billion. Press reports state that the main reason behind the rights issue is to raise sufficient funds to avoid the bank having to take part in the government’s banking insurance scheme that was set up after the recent banking troubles in the UK.

This is going to be an interesting one to watch. Lloyds has nearly 3 million shareholders with the majority being private shareholders. Whether or not these shareholders will be willing to take up these rights remains to be seen. They are due to meet to approve it this coming Thursday. In the run up to the exam though I’m sure students will have more to worry about than the outcome of this vote but make sure you’re aware of the various finance raising methods for the exam!

The ExP Group