Boerse from A to Z

Knowhow that could be useful, important or just interesting this year.

D for DAX40

On September 20, the largest reform of the selection indices to date will be completed with the expansion of the DAX to 40 companies. This is because a number of things will have changed not only for the leading index, but also for the number two, the MDAX. In addition to the size, these include a profitability rule, simplified calculation or segment affiliation.

 It all started with a market survey in the fall of 2020, in which around 600 participants of all kinds took part: Financial institutions, individuals, companies, associations, etc. The proposals, some of which were controversial, were intensively discussed by the index provider STOXX, also with regard to feasibility and impact on the entire index world. At the regular index date in December, the first adjustments were implemented, and now, with the inclusion of ten more companies, the final step has been taken for the time being.

The most important changes

  • Ranking as a basis for promotion or relegation is now based on only one parameter, market capitalization. Previously, stock exchange turnover was also relevant.
  • However, a minimum turnover is required.
  • Listing in the General Standard segment of the Frankfurt Stock Exchange is sufficient; previously, the Prime Standard segment was required.
  • New DAX companies must demonstrate profitability.
  • Only those that submit financial reports are part of the DAX family.
  • Companies must have an audit committee on the supervisory board.
  • The DAX will be expanded to 40 members, the MDAX reduced to 50.
  • Its composition is now reviewed every six months, not just in September.
  • Reasons for expanding the DAX to 40

One of the results of the market consultation mentioned above was the desire for more diversification in the DAX. This is partly due to the number of stocks and partly to the characteristics of the German economy, which is dominated by large chemical, automotive, software and industrial companies. Alternatives to the expansion to 40 stocks would be more complex rules to limit individual sectors and stocks or to weight all companies equally. The DAX should be comprehensible for all market participants, for professionals as well as for stock market newcomers. The largest 40 companies represent around 80 percent of the market capitalization in the Regulated Market, i.e. in the Prime and General Standard, and can be considered representative.

The most frequently asked question: Does the score change from Friday to Monday because of the new companies in the index?

No, because the calculation basis is adjusted accordingly. The 40 members in the index are re-linked on the basis of their closing price on September 17, as it is called in technical jargon. The then valid weights according to market capitalization will be used for the calculation. Only when the new stock market prices of the 40 shares are announced shortly after 9 a.m. on Monday morning does the DAX level change, as it does on every other trading day.

Debates on ESG criteria

The proposal to include an ESG dimension such as the exclusion of controversial weapons in the leading indices triggered many discussions with hardly reconcilable views of market participants. That is why this topic is being dealt with, examined and developed separately.


A for actively managed fund

Since the 1950s, widespread in Germany, highly regulated form of investing money in entire portfolios with the aim of diversifying risk, which is increasingly falling out of favor. This form of fund owes its growing bad reputation to higher fees and/or poorer performance compared with passive index funds, or ETFs for short, which track an index. Whereby the fees, which directly affect the return, are lowered by competitive pressure. According to the BVI, actively managed funds cost an average of 1.7 percent in returns per year, while passive ETFs cost just under 0.4 percent (own calculation). Nevertheless, actively managed funds are still better known: 35 percent of Germans invest in them, compared with 15 percent in ETFs, according to a survey by Quirion. And of course, traditional funds are ahead in terms of assets under management.

A for all-time high

"Aren't stocks already way too expensive to start investing now?" The DAX has set a new record high this week 15,568 points in the course and 15,558 on a closing price basis. New highs are also constantly being reported from other highly regarded stock exchanges, and short breaks in the high flight are considered "healthy corrections." The question frequently asked in the media and conversations is hardly surprising. "Should I still get in now?"

The answer is simple: yes, if your goal is long-term wealth accumulation.

"Market timing" versus "time in the market" are behind this contradiction. Market timing describes the strategy of buying securities cheaply and selling them at a profit, whether individual stocks or the entire market in an index fund. This is what non-shareholders in particular see as the goal in stock market transactions, which feeds some false beliefs such as: Investing in stocks is high-risk and the stock market is a casino. Of course, market timing can be a useful strategy. For those of us who want to spend a few hours a week with their analyses, we can use key figures such as KGF or charts. In the long run, however, very few are successful with it.  

Because we all don't know whether shares are really too expensive now or whether they will continue to rise and when the next (safe) crash will come. This is exactly where "Time in the Market" comes in. The time you are invested is the success factor. The longer investors are engaged in the market, the higher the return. If it respects the other two criteria: Invest broadly diversified and at a reasonable cost.

If you, like most people, don't know when stocks are cheap and when stocks are expensive, you shouldn't try to beat the market. Because that's what market timing refers to, being better than the market. Because, to quote another stock market adage: the best time to get into stocks was yesterday, the second best is today.

B for Bitcoin

Although it is only one of several cryptocurrencies, it is by far the best known. The Bitcoin hype runs in waves and is again at a new peak with the current record prices. As of today, one Bitcoin costs a good 41,000 US dollars, and the currency has gained about 40 percent in value since seven days alone.

The strong interest in Bitcoins cuts across all investor groups: Younger first-time investors are asking first for Bitcoins, then for stocks; on the other hand, institutional investors are also increasingly diversifying their portfolios with Bitcoin, holding them for an average of three years.

However, anyone trading or investing should be aware of the great risks associated with Bitcoin, reflected in the high volatilities and maximum losses in value in recent years.

Simplified: Bitcoin is a decentrally organized, non-governmental digital means of payment that is publicly traded and settled via a network of computers with equal rights and digital signatures. Pricing is based on supply and demand. The individual bitcoins are stored in personal digital wallets.

Ownership of a Bitcoin is secured via an encrypted string and a key-signed credit. The accounting is done collectively in a separate form of storage, the blockchain.

18.5 of 21 million achieved

The number of Bitcoins in circulation is now 18.5 million Bitcoins, and the amount of Bitcoins is limited by design to 21 million. According to Stefan Toetzke, this scarcity is increasingly giving Bitcoins the role of gold in custody accounts as a counterbalance to central bank money. Moreover, Bitcoins hardly correlate with other asset classes such as stocks or bonds, as the investment expert calculates.   

Bitcoin tracker in exchange trading

On the Frankfurt Stock Exchange, investors can gain exposure to Bitcoin via ETNs and certificates. Four ETNs - short for Exchange Traded Notes - are offered like ETFs on Xetra and the Frankfurt floor. What makes them special is the settlement via the central counterparty and the custody, especially important for institutional customers. Two participation certificates from Vontobel have been trading for a long time.

C for chart analyses

For some, it's coffee guesswork; for others, it's the holy grail of investment decision-making. The basic idea is that security prices move in patterns that repeat themselves. This makes certain price trends more likely than others. And: all the information is already contained in the prices.

The originator is Charles H. Dow, founder of the Wall Street Journal, with the Dow Theory named after him. The goal was and is the recognition of trends, especially trend changes.

For the derivation of short-term trend movements, chart analysis uses recurring graphic formations such as a V-shape or the famous head-and-shoulders shape. Support and resistance lines have special significance in chart analysis. They are derived on the basis of the historical course of the price. Breaking through these lines signals a new trend movement. Different chart types such as bar charts and candlestick charts are used.

In the market technique, statistical indicators are also used such as the 200-day line, moving averages or oscillators.  

Chart analysis is often equated with technical analysis, but it is only a subfield alongside market technique and the two lesser-known cyclical and sentiment techniques.  

Charting is considered the antithesis of fundamental analysis, which looks at company data and ratios, and many investors and traders use both approaches for stock picking.

D for direct listing

In addition to the classic IPO and the currently much-discussed shell companies called SPACs, there is a third option for companies to go public, the direct listing. Well-known technology companies in particular have been listed in this way in the USA with much attention, for example Spotify (2018), Slack (2019) or Coinbase (2021). Companies in Germany are also using direct placement, such as Linus Digital Finance recently.

In a classic IPO, short for Initial Public Offering, companies usually issue new shares, which they place with investors, accompanied by banks. As part of the pricing process with market consultations, a price range is proposed within which interested parties can subscribe to the shares, which are then allocated at the issue price. In a direct listing, also called a direct placement, direct listing or direct listing, the company does not raise capital. Instead, it applies for admission to the stock exchange while complying with the same transparency obligations as in an IPO. The share price is determined at the start of trading with the first stock market price according to supply and demand.

Frequently it is venture capital financed technology companies that use a direct listing. It allows existing investors to sell their shares in the regulated market with transparent pricing. The companies have no capital requirements, save considerable commission costs of accompanying banks. The holders have no holding periods to observe and avoid dilution of their shareholding by the new shares. The disadvantage for the companies is price uncertainty and the risk of higher volatility. This type of IPO is more likely to succeed if companies are at least well known in their market segments. Investors can only enter direct listings when the shares are traded. There is no opportunity for subscription gains.

I for inflation

Rising prices, especially short-term strong effects in individual markets, are at the moment sparking a discussion about inflation and interest rate scenarios that have been unknown for about 10 years. The key question on the stock markets and for investors is whether and when inflation can lead to a turnaround in interest rate policy and expansionary monetary policy.

The word 'inflation' comes from Latin and means 'to expand, to inflate'. In an economy, inflation refers to the rise in the general price level. And it does so over several years, not just in the short term, and not just for individual goods. Its counterpart is deflation, with falling prices.

The inflation rate in Germany was 2 percent in April 2021.

To calculate inflation a notional basket of goods is compiled. This is the basis for the Harmonized Index of Consumer Prices, or HICP, in the euro area. Harmonized because all countries in the EU use the same method.

Inflation occurs when aggregate demand for goods is higher than supply, which cannot be increased in the short term. Then prices rise.

How much inflation is bad?

Economic policy goal is price stability within a range that is around 2 percent for quite a few central banks, such as in the EU and the United States. Too high inflation is considered harmful because it devalues money and slows investment. Too low inflation is considered dangerous because an economy can then easily slip into deflation, and deflation is considered critical because it slows down the economy. The central hinges of monetary policy are interest rates and money supply, which are intended to increase demand in the form of consumption and investment.

On the capital market, inflation has a positive effect only on debt, because the value of money falls. Savings assets are devalued. Inflation only has an effect on other asset classes such as equities when it leads to a turnaround in interest rate policy.

Whether this will occur is the central question on which not all, but many economists, analysts and commentators agree: They say it is not in sight in the next few years.


L for LEI

LEI is an acronym of Legal Entity Identifier, an individual 20-digit code to identify the participants in a securities transaction. The specification of an LEI has been mandatory since January 2018. Following a transition phase, trading in around 780 shares of companies without an LEI will be discontinued on August 18. 

For securities to be traded on Xetra and the Frankfurt floor, a Legal Entity Identification, or LEI, must be available to uniquely identify the issuer of a security. 

Since January 2018, the EU Market Abuse Regulation (MAR) and the EU Markets in Financial Instruments Regulation (MiFIR) have required trading venues to transmit reference data for all traded securities on a daily basis. This also includes providing the correct LEI code of the respective issuers.

Until now, it has been possible to trade securities already listed on German stock exchanges from issuers that do not have an LEI as part of a transitional solution agreed with the supervisory authorities. This transitional period will end on the Frankfurt Stock Exchange at the close of trading on Wednesday, August 18, 2021. The discontinuation of trading in the affected securities will be published as an announcement. This currently affects a good 780 shares (as of July 29, 2021). Admission or inclusion as well as trading of the securities concerned on other stock exchanges is not affected by the Frankfurt securities measure.

P for private placement

Shares in fashion retailer ABOUT YOU, which went public on Wednesday, were placed privately before trading began. This makes the company the fourth in 2021 to choose the route, along with the three SPACs. Bike24, which has set its listing for next week, is also using this form of new issue. 

In a private placement, a special form of initial public offering, the company's securities are offered only to a selected group of investors before trading begins, and not to the public. If the buyers are exclusively so-called qualified investors, i.e. banks or funds, or if there are less than 100 non-qualified investors within the entire EU, some disclosure requirements do not apply. If, for example, the IPO involves a capital increase through the issue of new shares, this is not subject to the prospectus requirement. In contrast, in an IPO, short for Initial Public Offering, new shares are offered to a broad public for the first time.

S wie SPAC

SPACs, short for Special Purpose Acquisition Companies, are shell companies that finance themselves through an IPO before starting their actual business. They are placed privately before the start of trading.

A SPAC is a shell company without its own operating business. The sole objective of this shell company is to raise capital through a listing . The proceeds are subsequently used to acquire a non-listed company within a limited period of time and to indirectly list it on the stock exchange. Which company is taken over in this way is not yet determined at the time of the SPAC listing. Usually only the industry of the target company is known. 

Within a maximum of 24 months, a SPAC must find a company to acquire. Upon completion of this transaction, a previously unlisted company has been indirectly listed through the SPAC in this manner. The initiators and management are considered a key success factor.

The issue of a SPAC consists of a share and an associated warrant. The share is often issued at a fixed amount such as 10 US dollars, or 10 euros, and is privately placed in advance in large tranches, starting at 100,000 or 1 million, for example. The warrant offers an additional profit option in case of success.


Opportunities and risks for investors


Private investors can usually only invest in a SPAC from the start of trading by buying it at the exchange price, which often fluctuates around the issue price. In the favorable entry lies the opportunity for investors, namely when the acquisition of a target company with strong growth potential and corresponding price fantasy succeeds. 

The risks lie primarily in the much lower transparency requirement compared to the classic IPO. The target company is not known until the takeover and thus neither its business model nor its fundamental basis. 

W for window of opportunity

The first half of 2021 was a very good one for going public, also in Frankfurt. More companies made their stock market debut than at any time since 2000. Now the primary market is going into summer break, the window of opportunity is closing, as it is called in the jargon. This is the occasion for our stock market word of the week.

The window of opportunity refers to a period on the stock market when it can be favorable for companies to go public. This period is determined by several factors:

  • The market environment, i.e. how high are the share prices, accordingly "expensive" can a company place its shares on the market.
  • Investor sentiment for new shares, which also depends on whether they expect subscription gains, i.e. how issue and trading prices have developed in IPOs in the recent past.
  • Volatility as a barometer for uncertainty, because higher volatility also makes it riskier for the company to know how many shares they can sell and at what price.
  • But internal accounting processes also play a role, e.g. when which annual and semi-annual reports are ready, which are needed for the prospectus and the road show, which is the targeted approach to professional investors.

Moreover, this window is not open to all companies equally. Certain industries appeal more than others. The equity story, industry term for the argumentation in the investor and analyst approach, should fit the taste of the time.

16 new issues before the summer break

So far this year, 16 companies have gone public on the Frankfurt Stock Exchange, placing shares for just under EUR 9.4 billion. Of these, eight were IPOs with a first-time public offering, six were private placements (including three spacs), one was a listing-only IPO and one was a spin-off. In names by chronological order: AUTO1, Lakestar Spac I, Vantage Towers, FRIEDRICH VORWERK, SYNLAB, 468 Capital SPAC I, KATEK, Obotech Acquisition, APONTIS PHARMA, SUSE, LINUS Digital Finance, hGears, ABOUT YOU, BIKE24, Mister Spex and the Novem Group.

The forecasts of consultants, analysts and market commentators for the second half of the year are favorable. The IPO pipeline, another technical term, is well filled. 

by Edda Vogt, 2021, © Deutsche Börse AG

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