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Chapter 9

Chapter 9. Stock Exchanges. Major Characteristics of Stock Exchanges. ________________ market ________________ market ________________ market ________________ market ________________ market ________________ market. Specialized. Capital. Strictly organized. Closed. Competitive.

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Chapter 9

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  1. Chapter 9 Stock Exchanges

  2. Major Characteristics of Stock Exchanges • ________________ market • ________________ market • ________________ market • ________________ market • ________________ market • ________________ market Specialized Capital Strictly organized Closed Competitive Informed

  3. Functions of Stock Exchanges • Reach the targets of merger and takeover • Increase credibility 1. For enterprises: • Raise capital

  4. Functions of Stock Exchanges 2. For individuals: • Provide investing opportunities • Protect investors’ benefit • Provide information • 3. For the economy: • Better utilization of resources • Raise capital for the government • Provide economic indexes

  5. Hong Kong Exchanges and Clearing Limited Organization Structure Hong Kong Exchanges and Clearing Limited (HKEx) The Stock Exchange of Hong Kong Limited (SEHK) Hong Kong Futures Exchange Limited (HKFE) Hong Kong Securities Clearing Company Limited (HKSCC)

  6. The Stock Exchange of Hong Kong Limited (SEHK) • Established on 2nd April, 1986 • Provide a fair, transparent and efficient central securities market-place • A unification of: • The Hong Kong Stock Exchange • The Far East Stock Exchange • The Kam Ngan Stock Exchange • The Kowloon Stock Exchange

  7. Hong Kong Futures Exchange Limited (HKFE) • Incorporated in 1977 • Operate futures markets on the following products: • equity index • equity stock • interest rate • foreign currency

  8. Hong Kong Securities Clearing Company Limited (HKSCC) • Incorporated in May 1989 • Services: • Securities clearing and settlement • Electronic instructions for money settlement • Depository • Has an electronic system for securities transactions -- CCASS

  9. Comparison of Securities Settlement Before and After the Implementation of CCASS Before CCASS After CCASS Physical settlement Electronic settlement Cash or cheque settlement Electronic money settlement No central depository services Central depository services Risk of counterparty failure Reduction of such risk

  10. Regulatory Body -- Securities and Futures Commission (SFC) 1. Administer the relevant laws 2. Ensure market integrity 3. Protect the interests of investors 4. Support the development of HK as an international financial centre Functions

  11. The Primary and Secondary Markets • Primary market • The market in which new issues of securities are sold. • Secondary market • The market in which the issued securities are traded.

  12. The Growth Enterprise Market (GEM) • Reasons for the need of the GEM • Help growth companies to raise capital • “High growth, high risk” investment choice • Support the government’s policy to encourage high-tech and high value-added industries • Encourage venture capital investments

  13. Features of the Main Board & the GEM Features Main Board GEM Theme of market For large and established companies For growth companies Target investors All investors Professional and informed investors Profit requirement HK$50M (last 3 years) No requirement Operating history 3 years of trading record 2 years of active business pursuits Minimum market capitalization at the time of listing Shares: HK$100M Options, warrants or similar rights: HK$10M Shares: HK$46M Options, warrants or similar rights: HK$6M

  14. Methods of Issuing Shares Methods of issuing shares To the general public To designated people By prospectus/public issue Public placing Offer for sale Private placing Rights issue Bonus issue

  15. Methods of Securities Dealing An investor places an order A securities company enters the order into the computer system of the SEHK Automatic order matching and execution

  16. The Charges ina Securities Transaction • Commission • Transaction levy • Ad valorem stamp duty • Transfer deed stamp duty • Transfer fee

  17. Types of Securities • Ordinary shares • Preference shares • Warrants • Debentures • Bonds

  18. Characteristics of Ordinary Shares Voting rights Profit sharing Risks

  19. Characteristics of Preference Shares No voting rights Fixed dividends Priority in profit sharing

  20. Types of Preference Shares • ______________ preference shares • ______________ preference shares • ______________ preference shares • ______________ preference shares • ______________ preference shares Cumulative Non-cumulative Participating Redeemable Convertible

  21. Discussion What are the advantages and disadvantages of issuing and investing in preference shares?

  22. What is a Warrant? Warrant is acertificate issued to theexisting shareholders. The holder has an option to purchase a specified numberof shares at a specified price within a stipulated period of time.

  23. Advantages and Disadvantages of Issuing Warrants Advantages Disadvantages Will not affect the existing shareholding Affect investors’ confidence Provide more funds Reduce the share price Work as an indicator No need to distribute dividends

  24. Advantages and Disadvantages of Investing in Warrants Advantage Disadvantage Gain in price difference A warrant may worth nothing

  25. Characteristics of Debentures • A debenture holder is a creditor. • The holder earns interest even if the company makes a loss. • Have priority in capital repayment.

  26. Types of Debentures • ____________ debentures • ____________ debentures • ____________ debentures • ____________ debentures • ____________ debentures Secured Unsecured Redeemable Irredeemable Convertible

  27. What are the advantages and disadvantages of issuing and investing in debentures? ？？

  28. Bonds • Debentures issued by the _______________ or __________________. • Lower risk _______interest government public corporations lower

  29. Some Common Terminologies • Blue chips • Red chips • Second and third liners • Gilt-edge securities

  30. A&B Company A&B Company Political crisis Profit： $100,000,000 Factors Affecting the Prices of Shares • Performance of the company • Information on takeover and merger • Earnings per share • Price-earning ratio (P/E ratio) • Interest rate of banks • Economic factors • Political factors • Speculative activities

  31. Stock Exchange Indexes • A number to reflect the relative level of prices or value of the securities market of a day. • 3 main stock exchange indexes in HK: • Hang Seng Index (HSI) • All Ordinaries Index (AOI) • Growth Enterprise Index (GEI)

  32. Hang Seng Index • 33 constituent stocks • The calculation of the HSI: Sum of market capitalization* of 33 constituent stocks at a specific date ---------------------------------------------- X 100 = HSI at the date Sum of market capitalization of the constituent stocks on the base date* * Market capitalization = market price x the no. of shares issued Base date = 31st July, 1964 (the index of that day was 100)

  33. All Ordinaries Index • Base date = 2nd April, 1986 • Base value = 1,000 • Comprises all ordinary shares listed on the SEHK except: • Stocks of overseas companies whose principal activities are outside HK and Mainland China • Stocks suspended for over a year • Stocks not traded in Hong Kong dollars

  34. Growth Enterprise Index • Base date = ______________ • Base index = _____________ • Include all GEM __________ 17th March, 2000 1,000 stocks

  35. Speculation in Stock Exchanges • Speculation = buying and selling of stocks within a short period • People involved in speculation: • Bulls  ___________ • Bears  ___________ • Stags  _____________________________ optimistic pessimistic interested in the newly issued shares

  36. Futures Market • Difference between spot deal and futures deal: • Spot deal  __________ delivery • Futures deal  __________ delivery immediate future • People involved: • _________________________________ • _________________________________ • _________________________________ Merchants and manufacturers Speculators Hedgers

  37. Different Types of Futures Contracts in Hong Kong • _____________ products • _____________ products • _____________ products • _____________ products Equity index Equity Interest rate Currency

  38. Characteristics of Hang Seng Index Futures Contracts • Margin trading • Margin deposit • The operation of the Hong Kong Futures Exchange Clearing Corporation Limited (HKCC)

  39. Options Market • Two types of option trading: • Put option • Call option • Advantages of option trading: • Reduce risk • Earn premium • Maintain price stability • 2 main types of option contracts in HK: • stock options • index options

  40. Monitoring and Control by the HKSAR Government Ordinances Rules Codes

  41. Let's take a break.

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