Major Characteristics of Stock Exchanges market Specialized market

Major Characteristics of Stock Exchanges • • • ________ market Specialized ________ market Capital ________ Strictly organized market ________ market Closed ________ market Competitive ________ market Informed

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

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

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)

The Stock Exchange of Hong Kong Limited (SEHK) • Established on 2 nd 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

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

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

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

Regulatory Body -- Securities and Futures Commission (SFC) Functions 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

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.

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

Features of the Main Board & the GEM Features Main Board GEM Target investors For large and established For growth companies Professional and All investors informed investors Profit requirement HK$50 M (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$100 M Options, warrants or similar rights: HK$10 M Shares: HK$46 M Options, warrants or similar rights: HK$6 M Theme of market

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

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

The Charges in a Securities Transaction • • • Commission Transaction levy Ad valorem stamp duty Transfer deed stamp duty Transfer fee

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

Characteristics of Ordinary Shares Voti ng r ight s g n i r a h s t i Prof Risks

Characteristics of Preference Shares No voting ri ghts s d n e d i v i Fixed d Priority in profit sharing

Types of Preference Shares • • • _______ Cumulative preference shares _______ Non-cumulative preference shares _______ preference shares Participating _______ preference shares Redeemable _______ preference shares Convertible

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

What is a Warrant? Warrant is a certificate issued to the existing shareholders. The holder has an option to purchase a specified number of shares at a specified price within a stipulated period of time.

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

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

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.

Types of Debentures • • • ______ Secured debentures ______ debentures Unsecured ______ Redeemable debentures ______ Irredeemable debentures ______ Convertible debentures

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

Bonds • Debentures issued by the ________ or government _________. public corporations • Lower risk _______interest lower

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

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 A&B Company. Political crisis Political factors Profit： Speculative activities $100, 000

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)

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 = 31 st July, 1964 (the index of that day was 100)

All Ordinaries Index • Base date = 2 nd 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

Growth Enterprise Index 17 th March, 2000 • Base date = _______ • Base index = _______ 1, 000 • Include all GEM _____ stocks

Speculation in Stock Exchanges • Speculation = buying and selling of stocks within a short period • People involved in speculation: optimistic – Bulls ______ – Bears ______ pessimistic – Stags _______________ interested in the newly issued shares

Futures Market • Difference between spot deal and futures deal: Ø Spot deal _____ immediate delivery Ø Futures deal _____ delivery future • People involved: Merchants and manufacturers Ø _________________________________ Speculators Ø _________________ Hedgers

Different Types of Futures Contracts in Hong Kong • _______ Equity index products • _______ products Equity • _______ Interest rate products • _______ products Currency

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

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

Monitoring and Control by the HKSAR Government Ordin ances Rules s e d Co