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Chapter 2
Stock Exchanges
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Stock exchanges
Securities refer to legal documents that show either a persons __________ of a company or _____ to
buy shares at specified dates, or he/she has ____ money to a business firm or a government.
ownership rightlent
A stock exchange is an organised market for the tradingof _________ .securities
T he stock exchange in Hong Kong:
_______________________________________ H ong Kong Exchanges and Clearing Limited
Ab Ltd.
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F unction of stock exchanges
T o individuals
T o businessfirms
T o the economy
A s an ___________ channelG aining __________
investmentprotection
R eceiving ___________ information
R aising _______ B oosting _________
capitalcredibility
R aising _______ for the governmentand public corporationsF ully utilising _________
capital
resourcesA s an economic ________ indicator
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D emand Supply
F eatures of stock exchanges
Keen / Little competition
______________ determine the pricesM arket forces
_____________ as middlemenStockbrokers
Shares in the market are sold in standardised ____ .lots
M arket information on the stock exchange is _____ .openT rading on the stock exchange is being __________ toensure fairness in trading.
monitored
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P rocess of securities trading
Investor Stockbroker
1. A n investor places a _____________ with the stockbroker.market order
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P rocess of securities trading
Investor Stockbroker
1. A n 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. T he stockbroker then sends the order to her ______________ who is on the trading floor.representative
4 . Details of the transaction are transferred electronically tothe ____________________________________________ for completion on or before the _______ day of transaction.
A utomatic Order M atching and Executive Systemsecond
R epresentative
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Hong Kong Exchanges and Clearing Limited
Year 2000
______________________________________________ H ong Kong Exchanges and Clearing Limited (H KEx)
T he Stock Exchange of Hong KongLimited
Hong KongF uturesExchangeLimited
Hong KongSecuritiesClearingCompany Limited
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Hong Kong Exchanges and Clearing Limited
A ll listed companies must satisfy the rules andrequirements set by ______ .H KEx
Companies listed on the ___________ have to satisfyhigher requirements on assets, profits and performancetrack records.
M ain Board
Companies with potential for growth, but not yet able tomeet the requirements of the M ain B oard, can go publicthrough the _________________________.Growth M arket Enterprise
M ajor rules and practices in HKEx
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Hong Kong Exchanges and Clearing Limited
A ll listed companies must satisfy the rules andrequirements set by _____ .H KEx
O nly the ___________ are allowed to trade in HKEx.participantsT he participants must have ________________________ and sound ________ status.
professional qualificationsfinancial
M ajor rules and practices in HKEx
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Hong Kong Exchanges and Clearing Limited
A ll listed companies must satisfy the rules andrequirements set by _____ .H KEx
O nly the ___________ are allowed to trade in HKEx.participantsF loor trading has been assisted by __________.computers
M ajor rules and practices in HKEx
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Hong Kong Exchanges and Clearing Limited
M ajor rules and practices in HKEx
A ll listed companies must satisfy the rules andrequirements set by _____ .H KEx
O nly the ___________ are allowed to trade in HKEx.participantsF loor trading has been assisted by __________.computers
T he securities market is under the supervision of _____ ,the ________________________________ and the
________________________________________.
H KExSecurities and Futures Commission
Financial Services and the Treasury Bureau
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T ypes of securities
_______ : evidence that an investor owns a proportion of a companyShares
_________ : allow the holder to buy a specified number of shares at a fixed conversion price on or before a givendate.
W arrants
______ : recognise that a loan has been made to acompany or government.Bonds
________________________ : investors money is pooled together to invest in a portfolio that is managed by a fund management company.
U nit trusts/ M utual funds
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Shares
T wo main types of sharesO rdinary shares P reference shares
T he holders have / have novoting power.
Holders returns come from ___________ in the marketvalue of the shares andreceiving company
_________ .
appreciation
dividends
Holders face / do not facehigher risks.
T he holders have / have novoting power.
Holders receive dividends before / after ordinaryshareholders.
Holders can claim thecompanys assets before /after ordinary shareholders if the companies go intoliquidation.
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W hich of the following are preference shares?QCumulative preference shares
Non-cumulative preference sharesO rdinary preference shares
P articipating preference shares
Non-participating preference shares
Convertible preference shares
Shares
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Shares
O ther classification of shares __________ : shares of famous companies that have along history of high earnings and a large daily turnover.Blue chips
____________________________ : shares of smallcompanies.Second liners and third liners
__________ : stocks with the government of the mainlandof China as the main shareholder.Red chips
_________ : shares of companies that are registered onthe mainland but traded on the Hong Kong market inHong Kong dollars.
H shares
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W arrants
T he holders receive / do not receive interest .
T he 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
________ .reducedW arrants have no value once they _______ .expire
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W arrants
T he holders earn profit from the difference between _____________ at different periods of time.warrant prices
Example:O n A ugust 1, 200 3 , John bought a warrant at 50 cents.
A CF CompanyW arrant
Conversion price: $2.8
Expiry date:A ugust 1, 2006
Suppose on A ugust 1, 200 4 , thewarrant price increases to 70cents and John sells the warrant.
Johns profit:= ____________________ 70 cents - 50 cents20 cents
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B onds
The bond-issuing institution has to pay back the ________ to the bondholder on the due date. principal
T he bondholder is the debtor / owner of the bond-issuinginstitution.
________ bonds are guaranteed by company assets suchas real estate or machinery.Secured
R edeemable / Irredeemable bonds give the issuing firm
the right to buy them back before they mature.
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U nit trusts and mutual funds
T he risk of investment is ___________ as money isinvested in different types of securities.
diversified
Unit trust is established where investors are the
_______ of the unit as well as the _____________ .holders beneficiariesM utual fund is established in the form of a companywhere the investors are the ____________ of thecompany.
shareholders
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F or private limited companies, the issue of new sharesor the transfer of their existing shares can take placeonly with the agreement of _______________ .all shareholders
If public limited companies go public, their shares are __________________ .freely transferable
M ethods of issuing shares
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_______ Placing
M ethods of issuing shares
M ethods 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.
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscriptionA
n offer of shares to the public by a company or itsagent.
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscription
A n 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
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscription
______________ Offer for sale ___________ Rights issueA company gives existing shareholders a right to buy itsnew shares, based on the amount of shares each
shareholder already owns.
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscription
______________ Offer for sale ___________ Rights issue ___________ Bonus issueA company gives out new shares to existing shareholders.
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscription
______________ Offer for sale ___________ Rights issue ___________ Bonus issue __________________ Consideration issueA n issue of shares in a transaction or in connectionwith a takeover or merger.
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscription
______________ Offer for sale ___________ Rights issue ___________ Bonus issue __________________ Consideration issue ____________ I ntroductionA n application for listing shares already in issue withno marketing arrangements required.
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_______ Placing
M ethods of issuing shares
M ethods of issuing shares in the stock exchange
_____________________ Offer for subscription
______________ Offer for sale ___________ Rights issue ___________ Bonus issue __________________ Consideration issue ____________ I ntroduction ___________ Open offer A n offer to existing shareholders. It does
not have to be in proportion to the
shareholders existing holdings.
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F inancial institutions involved in issuing shares
A n ____________ acts for a company wishing toissue new shares.
issuing house
F unctions of an issuing houseA s an ___________ : agrees to buy the shares if theyare not bought by the public
underwriter
P repares the ___________ for submission to theHKS AR G overnment and HKEx.
prospectus
Distributes the prospectus to the public through _____________ and _____ .stockbrokers banksA dvertises the public offer
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P rimary market and secondary market
P rimary market
Secondary market
_________ marketIt is the market mainly between the
________________ and _____ _________
N ew issue
issuing institutionpurchaser
It is the market between ________ _________________ and ______
Investors can buy securities that are ______________
existing
already in issue
bulk
F irms can ___________ throughissuing securities
raise capital
securities holders buyers
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F actors affecting the prices of shares
Changes in economic and political conditionsG eneral economic conditions
economic
conditions
If people expect a good economic performance for a certain region,the investment demand willincrease / decrease and share
prices are likely to rise / fall.
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F actors affecting the prices of shares
Changes in economic and political conditionsT he prospect for the ________ and ________
If the prospect of aviation industryis poor, the price of these shareswill rise / drop.
industry company
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F actors affecting the prices of shares
Changes in economic and political conditionsT he foreign exchange rate
W hen the foreign exchange rate of a country
rises, the share prices are likely to rise / fall.exchange rate
time
share price
time
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F actors affecting the prices of shares
Changes in economic and political conditionsP olitical factor
If a country is unstable, itsshare prices are likely to rise /fall.
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D ividend yield = x 100%
F actors affecting the prices of shares
Changes in economic and political conditionsDividend yield
Annual dividendCurrent share price
Higher dividend yield Share price rises / falls
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P/E ratio = x 100%Current per share earnings
F actors affecting the prices of shares
Changes in economic and political conditionsDividend yield
Current share price
Higher P /E ratio Share price rises / falls
P rice-earning ratio ( P /E ratio)
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F actors affecting the prices of shares
Changes in economic and political conditionsDividend yield
P rice-earning ratio ( P /E ratio)
Speculation
presence of speculative activities share price changes
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S ecuritiesprices
Speculation in securities market
A ____ buys securities, hoping the price will increase.A _____ sells securities, hoping the price will decrease.bullbearB ulls buy securities and buyers to be able to sell themat higher price later. T he actual owning of securities iscalled a ____ position.long
Some bears sell securities even though they do not havethe securities in hand, the actual owing of securities is
called a ______ position.short ______________ is a method of speculation thatinvolves the use of borrowed funds.M argin trading
A n example of margin trading
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Suppose M rs Chan had $50,000 and wished to buyHutchison W hampoa which were selling at $50 per share.
= _____ shares of Hutchison W hampoa
A n example of margin trading
$5 0,000
1,000
If the share price increased to $55, M rs Chan could earn:
____________________________ ($55 - $50) x 1,000 = $5,000
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Suppose M rs Chan had $50,000 and wished to buyHutchison W hampoa which were selling at $50 per share.If M rs Chan opened a margin account with a financialcompany. B y depositing $50,000 into her account, she
could draw on an extra $50,000.
= ______ shares of HutchisonW hampoa2,000
$5 0,000 $5 0,000
+
If the share price increased to $55, M rs Chan could earn:
__________________________________________ ($55 - $50) x 2,000 = $10,000 (less interest)
A n example of margin trading
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Stock exchange indices show the ______ of securities prices and their ____________ . trend
Stock exchanges indices
performance ________________ H ang Seng I ndex
T he stock can be classified into four sectors: _______ , _______ , __________ and _____________
_______
finance utilities properties commerce and
industry
A n index that shows the changing prices of 33 stocksat HKEx.
It is complied by the _____________________.H SI Services Limited
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Stock exchanges indices
________________ H ang Seng I ndex _________________________ H ang Seng Composite I ndexIt includes the geographical series and industry series.
It is complied by the _____________________.H SI Services Limited
Stock exchange indices show the ______ of securities prices and their ____________ . trendperformance
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Stock exchanges indices
________________ H ang Seng I ndex _________________________ H ang Seng Composite I ndexS&P /HKEx Index Hong Kong Indices _________________________ includes Hong Kongslisted large companies.S&P/ H KEx Large CapI ndex
_____________________ includes most shares in HongKongs G rowth Enterprise M arket.S&P/ H KExGEM I ndex
T hey are complied by the _________________ and _____ .
Standard & PoorsH KEx
Stock exchange indices show the ______ of securities prices and their ____________ . trendperformance
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F utures are _________ that will trade on a particular _______ date at an agreed price for commodities andfinancial products.
contracts
T he Hang Seng Index F utures
future
T he buyers and sellers of the Hang Seng Index F uturessimply speculate on the level of the Hang Seng IndexF utures at a _____________________ .fixed settlement date
Each index point of the Hang Seng Index F utures
contract is valued at ____ per lot.$50A n example of Hang Seng Index F utures trading
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A n example of Hang Seng Index F utures trading
Mr Leung
M iss W ong agreed to buy and M r Leung agreed to sell acontract of Hang Seng Index F utures at 11,000 points to bedelivered on 1 June.
M r Leungs gain:
__________________________
__________________________ ($50 X 200) - brokerage fee= $10,000 - brokerage fee
Suppose the average on 1 June was 10,800 points. So M r
Leung made a profit / loss whileM
issW
ong made a profit / loss.
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A n example of Hang Seng Index F utures tradingM iss W ong agreed to buy and M r Leung agreed to sell acontract of Hang Seng Index F utures at 11,000 points to bedelivered on 1 June.
Suppose the average on 1 June was 10,800 points. So M r
Leung made a profit / loss whileM
issW
ong made a profit / loss.
M iss Wongs loss:
__________________________ __________________________ ($50 X 200) + brokerage fee= $10,000 + brokerage fee
Miss Wong
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F unctions of the Hang Seng Index F utures
T he Hang Seng Index F utures
________ : provides a way for investors to reducetheir risks.H edging
Provision of
___________ on what will happen tothe spot price information
P rofit-making
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M onitoring institutions in Hong Kong
T he monitoring of the securities market
_______________________________________ H ong Kong Exchanges and Clearing Limited
_____________________________________ The Securities and Futures Commission
____________________________________________ The Financial Services and the Treasury Bureau
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T he Securities and F utures O rdinance
T he monitoring of the securities market
establishing the ______________ of the Securities andF utures 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 ________ protectioninvestor
enforcing the rules of disclosure of a listed companys ______ equity