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Friday, October 05, 2007
Real Value Of Equity

Equity Shares, Options and Futures

Some of the reason for the current problems we see today in the world of Investment and Finance including some of the volatility of the financial markets, is linked to the changes we have introduced to the concept of the value of equity.

Singular capital structure models of the past, that were introduced for financing companies in the form of shares where you held an ownership position in a company and could watch your share price drive the collective total valuation of the company up or down, worked well to grow the asset base of some of the largest companies today. This growth in valuation was based upon real expectations of the growth prospects of a real physical company.

In todays financial markets, we have combined the traditional capital structure of asset backed shares with virtual Futures and Options where the total number of share based equity options or futures traded in a company in any day has the potential to be significantly greater than the actual annualized average volume of the real traded equity itself. It is this unregulated potential for imbalance that can bring the massive volatility swings that we see today in real share price valuations. This is because volatile swings in the valuations of puts and calls can add extra volatility to the price movement of real asset shares. This is because the real equity market needs to be tapped in order to hedge exposure to the duration of the option or future itself.

Some financial institutions and some wealthy individuals have the ability to play with virtual equity (options and futures) and have a serious impact on what should be a real performance based valuation of the real company itself through the expectations valuation of its shares. Options and futures are excellent financial instruments and they should exist, but they are meant to act as insurance or be higher risk instruments to the real asset based equity.

The total float of this virtual capital really needs to be a regulated percentage of a company's real share based traded capital. If this regulation isn't in place, and it isn't today, the total float of futures or options in an equity can cause imbalance to what is the real 'bricks and mortar' share valuation and impact a company's future itself. Some large investors can actually control the real asset equity price through manipulation of the options and futures themselves.

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