The Markets Jacques Magliolo
Today we take you to a brand new casino in downtown Johannesburg. No, not to the Calton Hotel or some shady hole in Hillbrow, but to Diagonal Street; to that financial stronghold called the Johannesburg Stock Exchange.
“When markets are quiet, we bet on horse racing,” says a senior equity dealer, an old timer who’s been on the trading floor since the 1970s. “In the days when Greg (Blank) was still trading, shares were not the only good tips we could get.” Blank is reputed to belong to a consortium which owns 60 race horses.
“The exchange,” says another trader, “is a perfect place for gamblers.” He indicates that in addition to “the thrill of outsmarting colleagues when buying or selling shares”, there are other financial instruments which are practically unknown by the public, but traded on the floor.
What are, for instance, nil paid letters. Analysts describe these as actual letters received by an existing shareholder when a new rights issue has been announced. When a company wants to issue shares, it offers its existing shareholders a right to buy these before they are offered to the rest of the public.
If the company decides to offer one new share for one existing share being held by the shareholder, it means that the investor will receive a letter to inform him that he has the right to buy the same quantity of new shares he already holds.
This letter is called a nil paid letter. The right to buy new shares in whatever ratio is not enough for dealers. A mechanism has been devised and promulgated by the JSE to enable investors to trade these rights, these nil paid letters.
If the company share is in high demand there is a strong likelihood that the letters will trade above nil cents. While it may seem insignificant and not involve great sums of money, take note of the following example:
Anglo decides to explore for gold in South America and needs R1- billion. It decides to raise the funds through a rights issue in South America and through the JSE. Their intention is to offer existing shareholders in South Africa one new share for every one held.
Among Anglo’s shareholders is SA Mutual, which holds 9,5 percent of Anglo shares, or 22-million shares. If the nil paid letter trades at one cents and SA Mutual decides that the project is too risky and sells these letters on the trading floor. For simply selling letters it stands to make R220 000.
Of course, trading in equities can be very limiting, so other complete exchanges are formed to trade in the risks associated with investing in those sectors and particular equities. The Futures and Options Exchanges do exactly that.
The first enables investors to decide today how particular sectors of the market will perform in the future and the second enables investors to acquire today a right to sell or buy an index movement in the future.
Sounds complicated? But then again so is horse racing to many people.