Chapter 2  Stock Exchanges
Stock exchanges Securities  refer to legal documents that show either a person’s  __________  of a company or  _____  to b...
Function of stock exchanges To individuals To business firms To the economy    As an  ___________  channel    Gaining  _...
Features of stock exchanges    Keen / Little  competition  ______________  determine the prices Market forces  ________...
Process of securities trading 1. An investor places a  _____________  with the stockbroker. market order Investor Stockbro...
Process of securities trading 1. An investor places a  _____________  with the stockbroker. market order 3. The representa...
Hong Kong Exchanges and Clearing Limited Year 2000 ______________________________________________ Hong Kong Exchanges and ...
Hong Kong Exchanges and Clearing Limited  All listed companies must satisfy the rules and requirements set by  ______ . H...
Hong Kong Exchanges and Clearing Limited  All listed companies must satisfy the rules and requirements set by  _____ . HK...
Hong Kong Exchanges and Clearing Limited  All listed companies must satisfy the rules and requirements set by  _____ . HK...
Hong Kong Exchanges and Clearing Limited Major rules and practices in HKEx  All listed companies must satisfy the rules a...
Types of securities  _______ : evidence that an investor owns a proportion of a company Shares  _________ : allow the ho...
Shares Two main types of shares Ordinary shares Preference shares  The holders  have / have no  voting power.  Holders’ ...
Which of the following are preference shares?       Shares Q  Cumulative preference shares  Non-cumulative prefere...
Shares Other classification of shares  __________ : shares of famous companies that have a long history of high earnings ...
Warrants  The holders  receive / do not receive   interest .  The holders  receive / do not receive   dividends .  If a...
Warrants  The holders earn profit from the difference between  _____________  at different periods of time. warrant price...
Warrants  The holders earn profit from the difference between the share price and the  _______________  when they exercis...
Bonds  The bond-issuing institution has to pay back the  ________  to the bondholder on the due date. principal  The bon...
Unit trusts and mutual funds  The risk of investment is  ___________  as money is invested in different types of securiti...
 For private limited companies, the issue of new shares or the transfer of their existing shares can take place only with...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange New shares are not open to t...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
   _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange    _____________________ Of...
Financial institutions involved in issuing shares  An  ____________  acts for a company wishing to issue new shares. issu...
Primary market and secondary market Primary market Secondary market    _________  market    It is the market mainly betw...
Factors affecting the prices of shares  Changes in economic and political conditions    General economic conditions If p...
Factors affecting the prices of shares  Changes in economic and political conditions    The prospect for the  ________  ...
Factors affecting the prices of shares  Changes in economic and political conditions    The interest rate When the bank ...
Factors affecting the prices of shares  Changes in economic and political conditions    The foreign exchange rate When t...
Factors affecting the prices of shares  Changes in economic and political conditions    Political factor If a country is...
Factors affecting the prices of shares  Changes in economic and political conditions  Dividend yield Annual dividend Cur...
Current per share earnings Factors affecting the prices of shares  Changes in economic and political conditions  Dividen...
Factors affecting the prices of shares  Changes in economic and political conditions  Dividend yield  Price-earning rat...
Speculation in securities market    A  ____  buys securities, hoping the price will increase. A  _____  sells securities,...
Suppose Mrs Chan had $50,000 and wished to buy  Hutchison Whampoa which were selling at $50 per share. =  _____  shares of...
Suppose Mrs Chan had $50,000 and wished to buy  Hutchison Whampoa which were selling at $50 per share. If Mrs Chan opened ...
Stock exchange indices show the  ______  of securities prices and their  ____________ . trend Stock exchanges indices perf...
Stock exchanges indices    ________________ Hang Seng Index    _________________________ Hang Seng Composite Index It in...
Stock exchanges indices    ________________ Hang Seng Index    _________________________ Hang Seng Composite Index    S...
Futures  are  _________  that will trade on a particular  _______  date at an agreed price for commodities and financial p...
An example of Hang Seng Index Futures trading Miss Wong agreed to buy and Mr Leung agreed to sell a contract of Hang Seng ...
An example of Hang Seng Index Futures trading Miss Wong agreed to buy and Mr Leung agreed to sell a contract of Hang Seng ...
Functions of the Hang Seng Index Futures The Hang Seng Index Futures    ________ : provides a  way for investors to reduc...
Monitoring institutions in Hong Kong The monitoring of the securities market    _______________________________________ H...
The Securities and Futures Ordinance The monitoring of the securities market    establishing the  ______________  of the ...
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Chapter 2 Stock Exchanges Stock exchanges

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Chapter 2 Stock Exchanges Stock exchanges

  1. 1. Chapter 2 Stock Exchanges
  2. 2. Stock exchanges Securities refer to legal documents that show either a person’s __________ of a company or _____ to buy shares at specified dates, or he/she has ____ money to a business firm or a government. ownership right lent A stock exchange is an organised market for the trading of _________ . securities The stock exchange in Hong Kong: _______________________________________ Hong Kong Exchanges and Clearing Limited …… Ab Ltd.
  3. 3. Function of stock exchanges To individuals To business firms To the economy  As an ___________ channel  Gaining __________ investment protection  Receiving ___________ information  Raising _______  Boosting _________ capital credibility  Raising _______ for the government and public corporations  Fully utilising _________ capital resources  As an economic ________ indicator
  4. 4. Features of stock exchanges  Keen / Little competition  ______________ determine the prices Market forces  _____________ as middlemen Stockbrokers  Shares in the market are sold in standardised ____ . lots  Market information on the stock exchange is _____ . open  Trading on the stock exchange is being __________ to ensure fairness in trading. monitored Demand Supply
  5. 5. Process of securities trading 1. An investor places a _____________ with the stockbroker. market order Investor Stockbroker
  6. 6. Process of securities trading 1. An investor places a _____________ with the stockbroker. market order 3. The representative will then carry out the market order by buying from or selling to other broker representatives. 2. The stockbroker then sends the order to her ______________ who is on the trading floor. representative 4. Details of the transaction are transferred electronically to the ____________________________________________ for completion on or before the _______ day of transaction. Automatic Order Matching and Executive System second Investor Stockbroker Representative
  7. 7. Hong Kong Exchanges and Clearing Limited Year 2000 ______________________________________________ Hong Kong Exchanges and Clearing Limited (HKEx) The Stock Exchange of Hong Kong Limited Hong Kong Futures Exchange Limited Hong Kong Securities Clearing Company Limited
  8. 8. Hong Kong Exchanges and Clearing Limited  All listed companies must satisfy the rules and requirements set by ______ . HKEx Companies listed on the ___________ have to satisfy higher requirements on assets, profits and performance track records. Main Board Companies with potential for growth, but not yet able to meet the requirements of the Main Board, can go public through the _________________________. Growth Market Enterprise Major rules and practices in HKEx
  9. 9. Hong Kong Exchanges and Clearing Limited  All listed companies must satisfy the rules and requirements set by _____ . HKEx  Only the ___________ are allowed to trade in HKEx. participants The participants must have ________________________ and sound ________ status. professional qualifications financial Major rules and practices in HKEx $ $
  10. 10. Hong Kong Exchanges and Clearing Limited  All listed companies must satisfy the rules and requirements set by _____ . HKEx  Only the ___________ are allowed to trade in HKEx. participants  Floor trading has been assisted by __________. computers Major rules and practices in HKEx
  11. 11. Hong Kong Exchanges and Clearing Limited Major rules and practices in HKEx  All listed companies must satisfy the rules and requirements set by _____ . HKEx  Only the ___________ are allowed to trade in HKEx. participants  Floor trading has been assisted by __________. computers  The securities market is under the supervision of _____ , the ________________________________ and the ________________________________________. HKEx Securities and Futures Commission Financial Services and the Treasury Bureau
  12. 12. Types of securities  _______ : evidence that an investor owns a proportion of a company Shares  _________ : allow the holder to buy a specified number of shares at a fixed conversion price on or before a given date. Warrants  ______ : recognise that a loan has been made to a company or government. Bonds  ________________________ : investors’ money is pooled together to invest in a portfolio that is managed by a fund management company. Unit trusts/Mutual funds
  13. 13. Shares Two main types of shares Ordinary shares Preference shares  The holders have / have no voting power.  Holders’ returns come from ___________ in the market value of the shares and receiving company _________ . appreciation dividends  Holders face / do not face higher risks.  The holders have / have no voting power.  Holders receive dividends before / after ordinary shareholders.  Holders can claim the company’s assets before / after ordinary shareholders if the companies go into liquidation.
  14. 14. Which of the following are preference shares?       Shares Q  Cumulative preference shares  Non-cumulative preference shares  Ordinary preference shares  Participating preference shares  Non-participating preference shares  Convertible preference shares
  15. 15. Shares Other classification of shares  __________ : shares of famous companies that have a long history of high earnings and a large daily turnover. Blue chips  ____________________________ : shares of small companies. Second liners and third liners  __________ : stocks with the government of the mainland of China as the main shareholder. Red chips  _________ : shares of companies that are registered on the mainland but traded on the Hong Kong market in Hong Kong dollars. H shares
  16. 16. Warrants  The holders receive / do not receive interest .  The holders receive / do not receive dividends .  If a holder exercises his/her rights to purchase the shares, the ownership rights of the original shareholders will be ________ . reduced  Warrants have no value once they _______ . expire
  17. 17. Warrants  The holders earn profit from the difference between _____________ at different periods of time. warrant prices Example: On August 1, 2003, John bought a warrant at 50 cents. Suppose on August 1, 2004, the warrant price increases to 70 cents and John sells the warrant. John’s profit: = ____________________ 70 cents - 50 cents 20 cents ACF Company Warrant Conversion price: $2.8 Expiry date: August 1, 2006
  18. 18. Warrants  The holders earn profit from the difference between the share price and the _______________ when they exercise their right to buy the share. conversion price Example: Suppose on August 1, 2006, the share price is $3.4 and John exercises his right to purchase the new share. John’s profit: = ____________________ $3.4 - $2.8 - 50 cents 10 cents On August 1, 2003, John bought a warrant at 50 cents. ACF Company Warrant Conversion price: $2.8 Expiry date: August 1, 2006
  19. 19. Bonds  The bond-issuing institution has to pay back the ________ to the bondholder on the due date. principal  The bondholder is the debtor / owner of the bond-issuing institution.  ________ bonds are guaranteed by company assets such as real estate or machinery. Secured  Redeemable / Irredeemable bonds give the issuing firm the right to buy them back before they mature.
  20. 20. Unit trusts and mutual funds  The risk of investment is ___________ as money is invested in different types of securities. diversified  Unit trust is established where investors are the _______ of the unit as well as the _____________ . holders beneficiaries  Mutual fund is established in the form of a company where the investors are the ____________ of the company. shareholders
  21. 21.  For private limited companies, the issue of new shares or the transfer of their existing shares can take place only with the agreement of _______________ . all shareholders  If public limited companies go public, their shares are __________________ . freely transferable Methods of issuing shares
  22. 22.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange New shares are not open to the public but are sold to a single buyer or an exclusive group of buyers.
  23. 23.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription An offer of shares to the public by a company or its agent.
  24. 24.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription An offer of shares to the public by, or on behalf of the holders of the shares already in issue or agreed to be subscribed.  ______________ Offer for sale
  25. 25.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription  ______________ Offer for sale  ___________ Rights issue A company gives existing shareholders a right to buy its new shares, based on the amount of shares each shareholder already owns.
  26. 26.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription  ______________ Offer for sale  ___________ Rights issue  ___________ Bonus issue A company gives out new shares to existing shareholders.
  27. 27.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription  ______________ Offer for sale  ___________ Rights issue  ___________ Bonus issue  __________________ Consideration issue An issue of shares in a transaction or in connection with a takeover or merger.
  28. 28.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription  ______________ Offer for sale  ___________ Rights issue  ___________ Bonus issue  __________________ Consideration issue  ____________ Introduction An application for listing shares already in issue with no marketing arrangements required.
  29. 29.  _______ Placing Methods of issuing shares Methods of issuing shares in the stock exchange  _____________________ Offer for subscription  ______________ Offer for sale  ___________ Rights issue  ___________ Bonus issue  __________________ Consideration issue  ____________ Introduction  ___________ Open offer An offer to existing shareholders. It does not have to be in proportion to the shareholders’ existing holdings.
  30. 30. Financial institutions involved in issuing shares  An ____________ acts for a company wishing to issue new shares. issuing house  Functions of an issuing house  As an ___________ : agrees to buy the shares if they are not bought by the public underwriter  Prepares the ___________ for submission to the HKSAR Government and HKEx. prospectus  Distributes the prospectus to the public through _____________ and _____ . stockbrokers banks  Advertises the public offer
  31. 31. Primary market and secondary market Primary market Secondary market  _________ market  It is the market mainly between the ________________ and _____ _________ New issue issuing institution purchaser  It is the market between ________ _________________ and ______  Investors can buy securities that are ______________ existing already in issue bulk  Firms can ___________ through issuing securities raise capital securities holders buyers
  32. 32. Factors affecting the prices of shares  Changes in economic and political conditions  General economic conditions If people expect a good economic performance for a certain region, the investment demand will increase / decrease and share prices are likely to rise / fall . economic conditions
  33. 33. Factors affecting the prices of shares  Changes in economic and political conditions  The prospect for the ________ and ________ If the prospect of aviation industry is poor, the price of these shares will rise / drop . industry company
  34. 34. Factors affecting the prices of shares  Changes in economic and political conditions  The interest rate When the bank interest rate is high, the share prices are likely to rise / fall .
  35. 35. Factors affecting the prices of shares  Changes in economic and political conditions  The foreign exchange rate When the foreign exchange rate of a country rises, the share prices are likely to rise / fall . exchange rate time share price time
  36. 36. Factors affecting the prices of shares  Changes in economic and political conditions  Political factor If a country is unstable, its share prices are likely to rise / fall .
  37. 37. Factors affecting the prices of shares  Changes in economic and political conditions  Dividend yield Annual dividend Current share price Higher dividend yield Share price rises / falls Dividend yield = x 100%
  38. 38. Current per share earnings Factors affecting the prices of shares  Changes in economic and political conditions  Dividend yield Current share price Higher P/E ratio Share price rises / falls  Price-earning ratio (P/E ratio) P/E ratio = x 100%
  39. 39. Factors affecting the prices of shares  Changes in economic and political conditions  Dividend yield  Price-earning ratio (P/E ratio)  Speculation presence of speculative activities  share price changes
  40. 40. Speculation in securities market  A ____ buys securities, hoping the price will increase. A _____ sells securities, hoping the price will decrease. bull bear  Bulls buy securities and buyers to be able to sell them at higher price later. The actual owning of securities is called a ____ position. long  Some bears sell securities even though they do not have the securities in hand, the actual owing of securities is called a ______ position. short  ______________ is a method of speculation that involves the use of borrowed funds. Margin trading An example of margin trading Securities prices
  41. 41. Suppose Mrs Chan had $50,000 and wished to buy Hutchison Whampoa which were selling at $50 per share. = _____ shares of Hutchison Whampoa An example of margin trading 1,000 If the share price increased to $55, Mrs Chan could earn: ____________________________ ($55 - $50) x 1,000 = $5,000 $50,000
  42. 42. Suppose Mrs Chan had $50,000 and wished to buy Hutchison Whampoa which were selling at $50 per share. If Mrs Chan opened a margin account with a financial company. By depositing $50,000 into her account, she could draw on an extra $50,000. = ______ shares of Hutchison Whampoa 2,000 If the share price increased to $55, Mrs Chan could earn: __________________________________________ ($55 - $50) x 2,000 = $10,000 (less interest) An example of margin trading $50,000 $50,000 +
  43. 43. Stock exchange indices show the ______ of securities prices and their ____________ . trend Stock exchanges indices performance  ________________ Hang Seng Index The stock can be classified into four sectors: _______ , _______ , __________ and _____________ _______ finance utilities properties commerce and industry A n index that shows the changing prices of 33 stocks at HKEx. It is complied by the _____________________. HSI Services Limited
  44. 44. Stock exchanges indices  ________________ Hang Seng Index  _________________________ Hang Seng Composite Index It includes the geographical series and industry series. It is complied by the _____________________. HSI Services Limited Stock exchange indices show the ______ of securities prices and their ____________ . trend performance
  45. 45. Stock exchanges indices  ________________ Hang Seng Index  _________________________ Hang Seng Composite Index  S&P/HKEx Index Hong Kong Indices _________________________ includes Hong Kong’s listed large companies. S&P/HKEx Large Cap Index _____________________ includes most shares in Hong Kong’s Growth Enterprise Market. S&P/HKEx GEM Index They are complied by the _________________ and _____ . Standard & Poor’s HKEx Stock exchange indices show the ______ of securities prices and their ____________ . trend performance
  46. 46. Futures are _________ that will trade on a particular _______ date at an agreed price for commodities and financial products. contracts The Hang Seng Index Futures future The buyers and sellers of the Hang Seng Index Futures simply speculate on the level of the Hang Seng Index Futures at a _____________________ . fixed settlement date Each index point of the Hang Seng Index Futures contract is valued at ____ per lot. $50 An example of Hang Seng Index Futures trading
  47. 47. An example of Hang Seng Index Futures trading Miss Wong agreed to buy and Mr Leung agreed to sell a contract of Hang Seng Index Futures at 11,000 points to be delivered on 1 June. Mr Leung’s gain: __________________________ __________________________ ($50 X 200) - brokerage fee = $10,000 - brokerage fee Suppose the average on 1 June was 10,800 points. So Mr Leung made a profit / loss while Miss Wong made a profit / loss . Mr Leung
  48. 48. An example of Hang Seng Index Futures trading Miss Wong agreed to buy and Mr Leung agreed to sell a contract of Hang Seng Index Futures at 11,000 points to be delivered on 1 June. Suppose the average on 1 June was 10,800 points. So Mr Leung made a profit / loss while Miss Wong made a profit / loss . Miss Wong’s loss: __________________________ __________________________ ($50 X 200) + brokerage fee = $10,000 + brokerage fee Miss Wong
  49. 49. Functions of the Hang Seng Index Futures The Hang Seng Index Futures  ________ : provides a way for investors to reduce their risks. Hedging  Provision of ___________ on what will happen to the spot price information  Profit-making
  50. 50. Monitoring institutions in Hong Kong The monitoring of the securities market  _______________________________________ Hong Kong Exchanges and Clearing Limited  _____________________________________ The Securities and Futures Commission  ____________________________________________ The Financial Services and the Treasury Bureau
  51. 51. The Securities and Futures Ordinance The monitoring of the securities market  establishing the ______________ of the Securities and Futures Commission and stating its functions and powers accountability  introducing a simplified ________ mechanism for exchange and clearing house participants licensing  setting up a flexible _______________ mechanism for securities and futures industry civil and criminal  setting up plans for ________ protection investor  enforcing the rules of disclosure of a listed company’s ______ equity
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