Overview of Australian Security Exchange Market - Case Study Example

Financial Analysis Author’s Name: Student Number: Course Name: Due Date: Table of content page Table of content page 2 Overview of Australian security exchange market 3 1.FOUR separate companies, 3 Westpac 3 Ordinary shares of Westpac 4 Common wealth bank 5 Preference shares of common wealth bank 5 BHP Billiton Company 6 Convertible notes of BHP Billiton Company 7 Telstra limited 7 Telstra limited rights issue 8 2. The characteristics of each of the FOUR types of securities 8 Characteristics of ordinary shares 8 Characteristics of preference shares 9 Characteristics of convertible notes 9 Characteristics of rights issue 9 3. A chance that an investor might lose their entire investment in any 10 4. Factors that an investor should consider when choosing an investment 11 References 12 Overview of Australian security exchange market The Australian security exchange market is the eighth among the largest stock markets in the world. Formation of this stock exchange market was due to mergers of six separate companies that dealt with stock exchange in Australia. The six companies put together were, Perth, Melbourne, Hobart, Adelaide, Sydney, and Brisbane. In the year 2006, the Sydney futures exchange merged with Australian stock exchange. Therefore, the shares of the company that formed a merger with Australian stock exchange are trading in the market. This stock exchange in the United States of America gives a variety of documents that are tradable. It conducts its operations from 10am to 4pm. Many stocks about 2000 listed in the market. A fifth of the total stocks in the market come from private investors (Easton and Ivanovic 2007 p.306 – 312). 1. FOUR separate companies, In this paper, focus is on four companies listed in the Australian stock exchange. Some of the companies under consideration include Westpac, BHP Billiton, the Common wealth bank, and the Telstra limited (Australia’s ten top companies, 2011). It is then from the companies that analysis of the preference shares, ordinary shares, convertible notes, and individuals’ right to purchase is possible. For each company it is necessary to explain its dealings and the industry to which it belongs. Westpac It is multinational companies know for delivering financial services. It is in the service providing industry known of delivering financial services to investors and shareholders. It is among the four big companies in Australia and is the second largest bank in New Zealand. The bank has over 10 million customers, 1,200 branches, and up to 2,800 ATMS. In Australia alone, it is considered second largest lender, and second among companies with numerous assets. Globally, the bank is efficient in ensuring corporate social responsibility. In its reports, the company is trying its best to offer the best or highest international standards in as much as corporate social responsibility are a concern. Its Australian security exchange code or issuers’ code is WBC. Ordinary shares of Westpac Westpac pays dividend for the ordinary shares to its investors twice per year. This happens in July and December. All these dates for making payments are always included in the company’s calendar. All the holders of shares that are being traded in the Australian security exchange always inform the registry of shares in Sydney when they want to trade their shares. In addition, for Westpac they have an option of deciding to deposit the dividend for the shareholders directly to the account in Westpac bank or in any other bank. The optional banks should be in Australia, United Kingdom, or New Zealand. Westpac during payment of dividend can deposit the amount to any credit union or building society that is in any of the optional counties or states. In case of any changes concerning payment of dividend to shareholders, it is necessary to have prompt notification to the registry of shares in Sydney. This notification should be in writing, also, in case if there is a situation where the shares held is less than $50,000 changes of value can be possible online. In Westpac this is done using the line market website. All the residents in the United Kingdom and New Zealand can only receive payment in stalling pounds or New Zealand dollars respectively using direct credit. Westpac finds it necessary to pay dividend to shareholders so that they can be motivated. For instance, in 2011 December, dividend will be paid to shareholders so they are expected to submit their details to Westpac by November 11 2011 (Elliott 2011, p.4). This is important for individuals who get their payment through cheques. For the resident shareholders in New Zealand and Australia, a plan known as dividend reinvestment plan is intact. They are free to reinvest directly on shares if they do not want to get money directly in form of dividend. Common wealth bank An international bank has numerous businesses globally in places such as United Kingdom, New Zealand, United States of America, Fiji, and Asia. It offers varying financial services that includes insurance, institutional banking, retail banking, brokerage services, and investment services. It is the second largest among the Australian banks listed in the security exchange market. The company is in the service industry that aims at offering financial services and offers variety of banking services to the customers. These services include savings, transactions, credit card issue, and loan to investors. All this services offered by this company enables it to get listing in the security exchange market. Its Australian security code or issuers’ code is CBA. Preference shares of common wealth bank The commonwealth bank issue preference shares from their company. This bank has a subsidiary known as the CBA limited that in most cases is responsible for making payments or issuing of shares. For instance, in 2005, the subsidiary made an offer to the public’s of New Zealand, to issue redeemable preference shares. This opened on 19 April 2005 and aimed at increasing hybrid equity by $350 million (Miller, Vandome, and McBrewster, 2010, p.90). While trying to advocate for this, the subsidiary company conducted a four weeks campaign to be able to find out the public view. This managed to curb a wide market. With this redeemable preference shares, the initial rate of dividend is 7.71% per annum, and payment is in a quarterly basis. Resetting of this figure is on an annual basis. This offer was the first made by common wealth bank to look on the market of New Zealand. This has enabled commonwealth bank to diversify its sources of capital. This issue is part of the banks regular program that aims at raising capital for its operations. For this preference shares, the minimum amount invested is $5,000 and after this, it goes with multiples of $1,000. Ones the company issued prospectors for the issuance of the shares, permission for its listing in the New Zealand was requested. BHP Billiton Company It is an international mining company whose headquarters are in Melbourne in Australia. Its main management office is located in London in the United Kingdom. It falls under the mining industry and is the largest in the world based on amount of revenue. Based on market capitalization, it ranks third. It is in 2001 that the company commenced its operations after mergers between Anglo-Dutch Billiton palace and the Broken Hill Property an Australian Company. This company is dually listed due to the mergers. The primary listing is in the Australian security exchange as it is the largest as measured in the Australian capitalization company. Its Australian security or issuers’ code is BHP. Convertible notes of BHP Billiton Company For the convertible notes of BHP Billiton Company, one pays 100% of the $1,000 nominal value while acquiring. After one year from the acquisition date, one receives an annual coupon rate of 11.5% per annum. At BHP Billiton Company, when one decides to go for the convertible notes, numerous advantages will result. Some of them include the assurance of 11.5% coupon rate per annum. This acts as a security as one is guaranteed the coupon rate no matter how the share price moves in the market. This coupon rates acts as a security in situations of tremendous fall in prices. In addition, the other advantage that results from the convertible notes is that it has a short maturity period. As far as taxation is a concern, the coupon rate of these convertible noted issued by BHP Billiton limited receives partial taxation. The interest rate component is taxable; will the other aspect of premium is free from tax. This has made majority of the people to acquire this convertible Telstra limited It is a media and telecommunication company in Australia. It majors in the network of telecommunicating, and marketing of access to internet, television, and voices. This company is in the telecommunication industry and ranked the second in Australia. Despite this, it has faced numerous competitions from other companies in the industry. The company is the largest in providing the fixed asset services. It was the first company to offer such services. Therefore, the company is in the listing in Australian stock exchange market. Its Australian security of issuers’ code is TLS. Telstra limited rights issue At Telstra, limited individuals have a chance and opportunity to purchase rights. The company offers their products and services locally and internationally. Numerous shareholders join and form part of Telstra Corporation limited. For instance, on 29 July 2011, new options subscribed to by shareholders were 104,902.767 or 46.68% of the total options on offer. Underwriters took up the remaining 54.32% shares that amounted to 124.748.450. The continuous issue of rights to investors has enabled Telstra Corporation to expand its market. Currently, the corporation has 2.4million retail outlets that are fixed and over 2.5 million outlets that are mobile. 2. The characteristics of each of the FOUR types of securities Characteristics of ordinary shares Ordinary shares represent equity of ownership of the company and this is always in proportion with the parentage of contribution to the company’s capital by the shareholders. They are entitled to dividend payment. However, payment of dividend is always after the preference shares dividend is paid. In addition, ordinary shares are entitled to a share of their residual economic value in case the company or business unwinds. Payment is after the bondholders and shareholders of preference shares receive the proceedings from the business. In most cases, the ordinary shares are unsecured creditors. Its prices in most cases are determined by the market forces, value of the business, and the sentiments from investors towards the company. Characteristics of preference shares Preference shares refer to a hybrid security that has features of both equity and debt. The characteristics of equity include payment of dividend as income to shareholders, and conversion to ordinary shares at some point in time. The features of debts on the other hand include payment of a definite income regularly, and existence of a fixed maturity date. Therefore, all this features form part of the preference shares. In addition to this features, preference shares are paid first before the ordinary shares and have a voting right. Characteristics of convertible notes A convertible note refers to a loan to the company that has an interest rate, and an investor has the right of converting the entire amount to equity in a situation where an institutional investor makes an investment subsequently. It always has a principle amount, which is always the amount borrowed from an investor. In addition, it has an interest rate, which the note yields after the investment period. In most cases while using the convertible note, an investor gets a risk premium (LLC. 2010, p.5). This aims at lowering the price paid per share as compared to that paid by a subsequent investor. On the repayment terms, assumption is that is the result. If this is not the case, then the parties should come up with an agreement on how to make the repayment. Characteristics of rights issue A rights issue refers to a strategy that most firms use to raise cash from the shareholders. It acts as a significant way of raising money in most of the companies quoted in the public. In need to issue shares to the public, it is always necessary to have a rights issue. This is so because, the existing shareholders have the rights to first acquire the shares. For rights issue, prices charged are always lower than the prevailing price in the market. For the shareholders who may not wish to take up their rights, they are always free to sell them to the public. For quoted companies in the market, the use of rights issue is always the easiest way of raising money. On the other hand, companies that are not listed always experience difficulty in using the rights issue. 3. A chance that an investor might lose their entire investment in any Investors can loss the entire investment in case of ordinary shares. This is because of their last payment after the preference shares. For the ordinary shares, if a company becomes bankrupt, and in any case decides to liquidate the assets, then the ordinary shareholders have a right get a share from the proceeds. These proceeds are after payment to shareholders. In case of a loss, this is going to be shared equally to shareholders as well. On ranking this securities from the less risky to the most risky we begin with the preference shares, rights issue, convertible note, and finally the ordinary shares (Khan and Jain 2007, p.22). For the preference shares, the shareholders are paid dividend earlier than any other form of shares. If a company is bankrupt, the loss that befalls to the company is first to the holders of preference shares. As compared to other securities, preference shares are less risky. This is so because dividend payment is to preference shareholders before sharing to holders of other shares. For the convertible notes, before the loan is given, a security is necessary. This aims at ensuring protective provision. Therefore, the use of this method to acquire capital may not be profitable. This is so because; one cannot get a loan before verification of the available assets. In case a company is bankrupt, such notes will not be possible to them. Therefore, chances of experiencing a loss will no longer be in existence. For the rights issue, this is always applicable to listed companies as they find it easy to use. On the other hand, not listed companies not like using it. The use of this strategy is common if a company is experiencing challenges in raising capital. This is applicable if a company is bankrupt because existing shareholders have a right to acquire the shares. 4. Factors that an investor should consider when choosing an investment Some of the factors that an investor should consider when choosing an investment (Roth, 2011, p.89) include: 1. Risk level When an individual is considering an investment, one ort to determine how much risky it is. This aims at ensuring that an individual do not invest in a risky activity that will make him or her run at a loss. If an investment is prone to risks, then one should consider an alternative investment that is not risky. 2. Level of return on an investment When one is investing resources in an investment, the main aim is maximize the level of returns. Therefore, if an individual finds out that an investment will not earn a high rate of return, then alternative options consideration is necessary. 3. Risk taking In most cases, highly risky investment results in high rate of return. Therefore, if an individual is a risk taker, then he or she can decide to invest in such an investment. On the other hand, if one is risk averse, then he or she should consider a less risky option. If I had 5,000 Australian dollars, I would consider investing in preference shares. This is so because it is less risky. In addition, in case a business starts operating at a loss, the holders of preference shares get payment first before holders of other types of securities. References Australia’s ten top companies. 2011. Australian security exchange. Retrieved on September 12, 2011 from http://www.asx.com.au/ Easton, S. & Ivanovic, I. 2007. "The Australian Security Exchange examination and Financial Review." Managerial Finance International Journal, Vol. 3 Iss: 3, pp.306 – 312. Elliott, G. 2011. Business with the wall street journal. The Australian. 13 September 2011, p. 4. Khan & Jain. 2007. Financial Management. New York: Tata McGraw-Hill Education Publisher. LLC. 2010. Australian Securities Exchange: Australian Securities Exchange. Memphis: General Books LLC Publishers. Miller, FP., Vandome, AF. & McBrewster, J. 2010. Australian Securities Exchange: Market Capitalization. Metropolis: Alphascript Publishing. Roth, M. 2011. Top Stocks 2011: A Share buyer’s Guide to Leading Australian Companies. Sydney: John Wiley’s & sons Publishers. Read More