Major Characteristics of Major Characteristics of Stock ExchangesStock Exchanges

• ________________ market

• ________________ market

• ________________ market

• ________________ market

• ________________ market

• ________________ market

SpecializedCapital

Strictly organized

ClosedCompetitive

Informed

Functions of Functions of Stock ExchangesStock Exchanges

– Reach the targets of merger and takeover

– Increase credibility

1. For enterprises:

– Raise capital

Functions of Stock Functions of Stock ExchangesExchanges

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 Hong Kong Exchanges and Clearing Limitedand Clearing Limited

The Stock Exchange of Hong

Kong Limited(SEHK)

Hong Kong Futures Exchange

Limited(HKFE)

Hong Kong Securities Clearing Company Limited

(HKSCC)

Hong Kong Exchanges and Clearing Li

mited(HKEx)

Organization Structure

The Stock Exchange of The Stock Exchange of Hong Kong Limited Hong Kong Limited

(SEHK)(SEHK)• Established on 2nd April, 1986• Provide a fair, transparent and efficient centr

al 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 Hong Kong Futures Exchange Limited Exchange Limited

(HKFE)(HKFE)• Incorporated in 1977

• Operate futures markets on the following products:– equity index– equity stock– interest rate– foreign currency

Hong Kong Securities Hong Kong Securities Clearing Company Limited Clearing Company Limited

(HKSCC)(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 Comparison of Securities Settlement Before and Settlement Before and

After After the Implementation of the Implementation of

CCASSCCASS

Reduction of such risk Risk of counterparty failure

Central depository servicesNo central depository services

Electronic money settlementCash or cheque settlement

Electronic settlementPhysical settlement

After CCASSBefore CCASS

Regulatory Body -- Regulatory Body -- Securities and Futures Securities and Futures

Commission (SFC)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

FunctionsFunctions

The Primary and The Primary and Secondary MarketsSecondary 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 The Growth Enterprise Market (GEM)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 Features of the Main Board & the GEMthe Main Board & the GEM

Shares: HK$46MOptions, warrants or similar rights: HK$6M

Shares: HK$100MOptions, warrants or similar rights: HK$10M

Minimum market capitalization at the time of listing

2 years of active business pursuits

3 years of trading recordOperating history

No requirementHK$50M (last 3 years)Profit requirement

Professional andinformed investors

All investorsTarget investors

For growth companies

For large and established companiesTheme of market

GEMMain BoardFeatures

Methods of Issuing Methods of Issuing SharesShares

By prospectus

/public issue

Offer for sale

Public placing

To the general public

Private placing

Rights issue

Bonus issue

To designated people

Methods of issuing shares

Methods of Securities Methods of Securities DealingDealing

Automatic order matching and execution

Automatic order matching and execution

An investor places an orderAn investor places an order

A securities company enters the order into the computer system of the SEHKA securities company enters the order into the computer system of the SEHK

The Charges inThe Charges ina Securities Transactiona Securities Transaction

• Commission

• Transaction levy

• Ad valorem stamp duty

• Transfer deed stamp duty

• Transfer fee

Types of SecuritiesTypes of Securities

• Ordinary shares

• Preference shares

• Warrants

• Debentures

• Bonds

Characteristics of Characteristics of Ordinary SharesOrdinary Shares

Voting rights

Voting rightsProfit sharingProfit sharing

RisksRisks

Characteristics of Characteristics of Preference SharesPreference Shares

No voting rightsNo voting rights

Fixed dividendsFixed dividends

Priority in profit sharingPriority in profit sharing

Types of Types of Preference SharesPreference Shares

• ______________ preference shares

• ______________ preference shares

• ______________ preference shares

• ______________ preference shares

• ______________ preference shares

Cumulative

Non-cumulative

ParticipatingRedeemable

Convertible

What are the advantagesadvantages and

disadvantagesdisadvantages of issuing and

investing in preference shares?

What is a Warrant?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 Advantages and Disadvantages of Issuing Disadvantages of Issuing

WarrantsWarrants

Work as an indicator

No need to distribute dividends

Reduce the share priceProvide more funds

Affect investors’ confidenceWill not affect the existing shareholding

DisadvantagesDisadvantagesAdvantagesAdvantages

Advantages and Advantages and Disadvantages of Investing Disadvantages of Investing

in Warrantsin Warrants

A warrant may

worth nothing

Gain in price

difference

DisadvantageDisadvantageAdvantageAdvantage

Characteristics of Characteristics of DebenturesDebentures

• A debenture holder is a creditor.

• The holder earns interest even if the company makes a loss.

• Have priority in capital repayment.

Types of DebenturesTypes of Debentures

• ____________ debentures

• ____________ debentures

• ____________ debentures

• ____________ debentures

• ____________ debentures

Secured

Unsecured

RedeemableIrredeemable

Convertible

What are the advantages

and disadvantagesof issuing andinvesting in

debentures?

What are the advantages

and disadvantagesof issuing andinvesting in

debentures?

？？？？？？？？

BondsBonds

• Debentures issued by the _______________ or

__________________.

• Lower risk _______interest

governmentpublic corporations

lower

Some Common Some Common TerminologiesTerminologies

• Blue chipsBlue chips• Red chipsRed chips• Second and third linersSecond and third liners• Gilt-edge securitiesGilt-edge securities

Factors Affecting Factors Affecting the Prices of Sharesthe Prices of Shares

• Information on takeover and merger• Earnings per share• Price-earning ratio (P/E ratio)• Interest rate of banks• Economic factors

• Performance of the company

• Political factors• Speculative activities

A&B A&B CompanyCompany

ProfitProfit ：：$100,000,000$100,000,000

A&B A&B CompanyCompanyPolitical crisisPolitical crisis

Stock Exchange Stock Exchange IndexesIndexes

• 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 IndexHang 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)

All Ordinaries IndexAll 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

Growth Enterprise Growth Enterprise IndexIndex

• Base date = ______________

• Base index = _____________

• Include all GEM __________

17th March, 2000

1,000

stocks

Speculation in Speculation in Stock ExchangesStock 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

Futures MarketFutures Market• Difference between spot deal and

futures deal: Spot deal __________ delivery Futures deal __________ delivery

immediate

future

• People involved: _________________________________ _________________________________ _________________________________

Merchants and manufacturersSpeculatorsHedgers

Different Types of Futures Different Types of Futures Contracts in Hong KongContracts in Hong Kong

• _____________ products

• _____________ products

• _____________ products

• _____________ products

Equity index

Equity

Interest rate

Currency

Characteristics of Hang Seng IndCharacteristics of Hang Seng Index Futures Contractsex Futures Contracts

• Margin trading• Margin deposit• The operation of the Hong Kong Futures Exchange Clearing Corporation Limited (HKCC)

Options MarketOptions 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 Monitoring and Control by the HKSAR by the HKSAR GovernmentGovernment

OrdinancesOrdinancesOrdinancesOrdinances RulesRulesRulesRules

CodesCodesCodesCodes