Transcript C09 Personal Financial Management

Basics of Personal Financial
Management –
Stock Trading as an Investment
Lesson 1: Stock Trading in Hong Kong
and Stock Price (Part I)
1
Why trading stocks?
• From Investor’s Perspective:– Accumulation of wealth
– Receiving dividend income
– Asset allocation
• From Company’s Perspective:– Raise funds
2
Stocks
• Represent the share of ownership of a
company and a claim on its assets and
earnings
• Holders of stocks are called stockholders
3
Activity 1-Disadvantage of
buying stock
• What are the disadvantages of buying
stock instead of putting your money into
savings accounts.
4
Flow of stock trading and settlement
Order execution
Placing order
via phone or
internet
Stock brokers
(Exchange Participants)
Order confirmation
& settlement
Custody,
Investors
HKEx
clearing &
settlement
Trade
data
Investor Participant A/C
(Optional)
HKSCC
5
The stock trading system
• The Hong Kong Stock Exchange operates
electronic stock trading system
• A matching system automatically matches bids
(intended buyers of shares) with asks (intended
sellers of shares) at the best possible prices
(AMS/3)
• If the market works properly, the bid and ask price
on a particular transaction will be as close to each
other as possible
6
The stock settlement system
• Clearing and settlement via Central
Clearing And Settlement System
(“CCASS”) operated by Hong Kong
Securities Clearing Company Limited
• Settlement cycle : T+2 (within 2 working
days from the trading day)
• Company Account or Investor Participant
Account (optional)
7
Hang Seng Index
• The Hang Seng Index ("HSI") is one of the
earliest stock market indexes in Hong Kong.
Publicly launched on 24 November 1969,
the HSI has become the most widely quoted
indicator of the performance of the Hong
Kong stock market
• The base of HSI points was set equivalent to
the stocks' total value as of the market close
on 31 July, 1964, when HSI was first
published
8
Activity 2-The Ups and Downs
of Hang Seng Index
• The following chart shows the Hang Seng
Index from 1 Jan 1993 to 9 Dec 2013.
• Do you know what makes the ups and
downs of Hang Seng Index as shown on
the chart ?
1- HSI downs from 1997 to 1998
2- HSI downs from 2000 to 2003
3- HSI ups from 2003 to 2007
4 - HSI downs from 2007 to 2008
(Hint: Think about the major events occurred in Hong
Kong during the above period)
9
Hang Seng Index from Jan. 1993 to Dec. 2013
4
1
2
3
10
Importance of Hang Seng Index
• A general reflection of the performance of
stock market
• A measure of the overall health of a sector
• A benchmark to compare a specific stock
• A basis for investment returns
11
Stock Price
• Stock price is determined by the price
which buyers are willing to pay and
sellers are willing to sell
–Buyers based on new market
information to buy the stock
–Sellers based on new market
information to sell the stock
12
Major factors affecting stock
prices
• The following are major factors which
affects stock prices
– General economic condition
– Political factors
– Interest rates
– Industry prospect
– Company performance
– Dividend policy
– Speculation
13
General economic condition
• General economic condition is usually
measured by Gross Domestic Product
(GDP)
• GDP growth is an indicator of stock market
prospects
• A strong (poor) growth in GDP indicates a
strong (weak) stock market
14
Example – Hong Kong GDP Vs.
HSI
GDP +9.8%
GDP -2.8%
15
HSI from 1.1. 2006 to 31.12.2009
Example – Hong Kong GDP
Vs. HSI
1. Strong economic growth rate
-The HK GDP growth rate was 9.8% in 2007*
=> Hang Seng Index went up
2. Weak economic growth rate
- The GDP growth rate was -2.8% in 2009*
=> Hang Seng Index went down
* source: Hong Kong Annual Digest of Statistics
16
General economic condition
• Examples of factors affecting general
economic conditions:– Employment rate
– Statutory minimum wage
– Consumption / consumers’ confidence
– Investment in infrastructure
17
Political factors
• Stock price can also be affected by the
following political factors:
– War
– Terrorist activity
– Election
• The above would pose high risk to the
stock market, and the stock market index
may fluctuate substantially
18
Conclusion
• Reasons for stock trading
• Stock trading and settlement system in
Hong Kong
• The importance of Hang Seng Index
• Major factors affecting stock prices
• General economic condition Vs. stock
price
• Political factors Vs. stock price
19
The End
20
Basics of Personal Financial
Management –
Stock Trading as an Investment
Lesson 2: Stock Price (Part II)
21
Interest rates
• Generally speaking:
− Lowering interest rate could stimulate the
economy and hence the stock market
− Raising interest rate could dampen the
economy and hence has negative impact on
the stock market
22
Interest rates
• Government intervention affects interest
rates
23
Activity 3-Interest rate and stock
price
• The U.S. government has started to print
money to buy government securities
from banks since 2008. What would be
the impact on the interest rate, and the
stock market?
24
Industry prospect
• If prospect for a particular business sector is
good, the stock price of this type of shares will
rise
• If the prospect for a particular business sector
is poor, the price of this type of shares will
drop
25
Industry prospect
• The prospect of the industry depends
on its Industrial cycle:
1.Early stage
2.Growth stage
3.Mature stage
4.Decline stage
• Usually, when there is new
technology/products developed or new
lifestyle/trends formed, its related
industries will experience high growth
rate
26
Example – Tencent
(stock code 700)
• Background information:
• Nature of business: Provision of Internet value-added
services, mobile and telecommunication value-added
services and online advertising services in the PRC
etc.
• Field of industry: information technology- software &
services
• Listing date : 16 June 2004
• Share prices in recent years:
•
•
•
•
In June 2004: $3.7
In July 2009: $100
In January 2011: $200
In September 2013: $400
27
Company performance
• Company performance:
– Earnings
– Management
28
Company performance- Earnings
• Higher earning growth will drive up a stock
price
• The stock market is forward looking. That is,
stock prices are established based on the
expectations that prospective investors have in
the future earning power of a company
29
Company performance- Earnings
• The Price-earning ratio (P/E) is usually used
by investors to measure the performance of a
company
• It is obtained by dividing the current stock
price by the earning per share of a company
• For example, if a stock has a price-earnings
ratio of 25, it means that investors are paying
$25 for each $1 of earnings
30
Company performanceManagement
• Competency and quality of
Management
• Appropriate management strategies
can improve profitability and
operating efficiency by:– Increasing sales
– Reducing costs
31
Dividend policy
• Dividend policy is the policy used by a
company to decide on how much it will pay
out to shareholders as dividends
• Companies tend to maintain stable
dividend policy
• Stock price may be affected by the
unexpected change in dividend policy
32
Dividend policy
• Dividend payout ratio represents
percentage of profit distributed as dividend
• Example: Hang Seng Bank distributed a
HK$5.30 dividend per share in 2012 and
the earnings per share was HK$10.16 in
2012
• The dividend payout ratio is $5.3/$10.16 X
100% = 52%
33
Example:
SmarTone (Stock code 315)
• Background information:
– Nature of business: Provision of telecommunication
services in Hong Kong
– Listing date : 31 Oct 1996
• Smartone used to adopt a high dividend policy by
paying 100% of its earnings to shareholders in the
form of cash dividends
• On 12 Sept 2013, the management announced to
cut its dividend payout ratio from 100% to 60%
• Its share price dropped by about 13% on 12 Sept
2013
34
Activity 4-Computation of
payout ratio and P/E of HSBC
• You are provided with the following
information related to HSBC in 2012 (stock
code 5):– HK$3.488 dividend per share
– Share price was $82.65
– Earnings per share was HK$5.7357
35
Activity 4
• Based on the above information:
1) Compute the P/E ratio of HSBC ; and
2) Compute the dividend paidout ratio of HSBC .
36
Speculation
• A speculator is willing to take high risks in
view of making large amount of profits in a
short period of time
• A speculator may ride on stock market
sentiment to trade stock (bet a stock price
trend to continue or reverse) and make
stock prices volatile
37
Learn more about stock price
changes……unpredictable.
• Stock price will change in response to new
information
• Since information arrives in a random fashion,
stock prices react unpredictably
• There is an equal probability that the next
price will move up, down or remain
unchanged
• Therefore, from academic point of view, share
price cannot be predicted
38
Conclusion
• The following are factors affecting stock
prices
– Interest rates
– Industry prospect
– Company performance
– Dividend policy
– Speculation
39
The End
40
Basics of Personal Financial
Management –
Stock Trading as an Investment
Lesson 3: Main Board (MB) and
Growth Enterprises Market (GEM)
41
How many stock exchange(s) is/are
there in Hong Kong?
42
Hong Kong Exchanges and Clearing
Limited (HKEx)
• Leading global operator of exchanges and
clearing houses based in Hong Kong
• One of the world’s largest exchange groups by
market capitalisation.
Source: HKEx’s website
43
Roles of HKEx
• Frontline regulator of central securities and
derivatives
• Ensure orderly and fair securities and
derivatives markets
Source: HKEx’s website
44
Functions of HKEx
• To investors
– Make investment
– Gain protection
– Receive information
• To listed companies
– Raise capital
– Gain credibility
– Get valuation
45
10 stock exchanges with largest market capitalisations at
year-end 2011 and 2012
2011
US $
Billion
Increase
Exchange
2012
US $
Billion
% of total
market
capitalisation
2012
2011
1
NYSE Euronext (US)
14,086
11,796
19.4%
25.8%
24.9%
2
NASDAQ OMX (US)
4,582
3,845
19.2%
8.4%
8.1%
3
Tokyo Stock Exchange
3,479
3,325
4.6%
6.4%
7.0%
4
London Stock Exchange
3,397
3,266
4.0%
6.2%
6.9%
5
NYSE Euronext (Europe)
2,832
2,447
15.7%
5.2%
5.2%
6
Hong Kong Stock Exchange
2,832
2,258
25.4%
5.2%
4.8%
7
Shanghai Stock Exchange
2,547
2,357
8.1%
4.7%
5.0%
8
TMX Group (Toronto)
2,059
1,912
7.7%
3.8%
4%
9
Deutsche Borse (Germany)
1,486
1,185
25.4%
2.7%
2.5%
10
Australian Securities Exchange
1,387
1,198
15.8%
2.5%
2.5%
Source: World Federation of Exchange 2012 Market highlights published on 22 January 2013
46
Two separate boards
HKEx
Operates
Main Board
(MB)
Growth
Enterprise
Market (GEM)
47
Number of listed companies in MB
• At the end of 2012, there was 1,368*
companies listed on the MB
*source: FACT Book 2012 , HKEx
48
Characteristic of MB
• The MB is a market for more established
business with the fulfillment of profits
requirement of the Stock Exchange of Hong
Kong
49
Characteristic of MB
• Most outstanding and famous Hong Kong and
Chinese companies’ stocks are traded through
the MB
• As required by the MB Listing Rules, financial
statements of listed companies are to be
published on a half-yearly basis (i.e. two times
per year)
50
Market Capitalisation of MB from 1986 to 2012
Source: Fact Book 2012, HKEx
51
10 leading companies in market
capitalisation at 31 Dec 2012 (MB)
Ranking
Stock
Code
Company
1
941
China Mobile Limited
1,814,016.81
2
5
HSBC Holdings PLC
1,501,954.62
3
939
China Construction Bank
Corporation – H shares
1,495,395.73
4
883
CNOOC Limited
749,165.01
5
1398
Industrial and Commercial Bank of
China Ltd – H shares
477,367.25
6
2888
Standard Chartered PLC
472,557.51
7
700
Tencent Holdings Ltd
461,149.24
8
1299
AIA Group Ltd
364,331.00
9
13
Hutchison Wampoa Limited
344,906,70
10
16
Sun Hung Kai Properties Limited
308,716.59
Source: Fact Book 2012, HKEx
Market capitalisation
(HK$ million)
52
Number of listed companies in GEM
• At the end of 2012, there was 179* companies
listed on the GEM
•
Source: Fact Book 2012, HKEx
53
Characteristic of GEM
• The GEM was established in November 2009
• GEM is for growth companies that do not
meet the requirement of profitability or track
record for Main Board
• Stocks traded in GEM are considered relatively
riskier than Main Board due to its larger
volatility in share prices
54
Characteristic of GEM
• GEM operates on the philosophy of “buyers
beware” and “let the market decide” based on
a strong disclosure regime. Therefore, more
frequent and timely disclosure is required
• As required by GEM Listing Rule, financial
statements of listed companies are to be
published on a quarterly basis (i.e. four times
per year)
55
Characteristic of GEM
• In GEM, the future performance of growth
companies is susceptible to great uncertainty.
Because of the higher risks involved, GEM is
designed for professional and informed
investors
Source: HKEX website
56
Market capitalisation of GEM from 1986 to
2012
Source: Fact Book 2012, HKEx
57
10 leading companies in market
capitalisation as at 31 Dec 2012 (GEM)
Ranking
Stock
Code
Company
1
8137
Honbridge Holdings Limited
5,283.33
2
8008
Sunevision Holdings Limited
3,692.34
3
8122
Life Tech Scientific Corporation
3,000.00
4
8086
ePRO Limited
2,826.46
5
8035
Binhai Investment Limited
2,636.84
6
8-32
Viva China Holdings Limited
2,210.58
7
8167
Neo Telemedia Limited
1,861.54
8
8292
HC International, Inc.
1,742.69
9
8066
Phoenitron Holdings Limited
1,674.38
10
8090
China Assurance Finance Group Limited
1,651.01
Source: Fact Book 2012, HKEx
Market capitalisation
(HK$ million)
58
Activities 5 - Invest in MB or GEM?
• Gary is planning to invest his money in stock
market in Hong Kong. He does not know
whether he should invest his money in the
Main Board or Growth Enterprise Market. He
does not have any prior experience investing
in the stock market. He also does not have
much money and prefers less risk. As an
investment consultant, advise Gary on his
investment choices.
59
Activities 5 - Invest in MB or GEM?
• a) Complete the following table :Items
No. of listed
companies as at
31/12/2012
Market capitalization
as at 21/12/2012
Financial reporting
Requirement
Types of listed
companies
Types of investors
MB
GEM
60
Activities 5 - Invest in MB or GEM?
• b) Which market should Gary invest in? Justify
your advice
61
Conclusion
• Functions and roles of the HKEx
• Differences between the MB and GEM
– Numbers of companies
– Characteristic
– Market capitalisation
62
The End
63
Basics of Personal Financial
Management – Stock Trading as
an Investment
Lesson 4: Listing requirements of
MB and GEM
64
Mr. Leung, the sole
shareholder of ABC
manufacturing company
Ltd. , is considering to raise
funds to finance the
expansion of his business.
65
Go Public
• When a company goes public for funds, its
shares are listed and traded on the stock
exchange such as HKEx
• There are two boards in the HKEx for stock
trading, namely the Main Board (MB) and the
Growth Enterprise Market (GEM)
• Private limited companies are not allowed to
sell their shares on the two boards unless they
meet certain listing requirements
66
Basic listing requirements - MB
• Operating history and management
• Financial requirements
67
Operating history and
management (MB)
• Must have a trading record period of at least 3
financial years with:
– Management continuity for at least the 3
preceding financial years; and
– Ownership continuity and control for at least the
most recent audited financial year
68
Financial requirements (MB)
• Must satisfy one of the following three tests:
– profit test; or
– market capitalisation/revenue/cash flow test; or
– market capitalisation/revenue test
69
Profit test (MB)
• Profits of HK$20 million for most recent year and of
aggregate of HK$30 million for the first two years
Not less
than
HK$20 Million
Net Profits
Not less than HK$30
Million
Year
2011
2012
2013
70
Market capitalisation/revenue/cash
flow test (MB)
• Revenue
– At least HK$500 million for the most recent
audited financial year
• Cash flow
– Positive cash flow from operating activities of at
least HK$100 million in aggregate for the three
preceding financial years
• Minimum market capitalisation
– At least HK$2 billion at the time of listing
71
Market capitalisation/revenue test
(MB)
• Revenue
– At least HK$500 million for the most recent
audited financial year
• Minimum market capitalisation
– At least HK$4 billion at the time of listing
72
Number of newly-listed companies
on the MB of HKEx
Number of New Companies
Source: Fact Book 2012, HKEx
Year
73
Size of funds raised from newly-listed
companies on the MB
HK$ Billion
Source: Fact Book 2012, HKEx
Year
74
Basic listing requirements -GEM
• Operating history and management
• Financial requirement
75
Operating history and
management (GEM)
• Must have a trading record of at least 2 full
financial years with:
– Substantially the same management throughout
the 2 full financial years; and
– A continuity of ownership and control throughout
the full financial year immediately preceding the
issue of the listing document
76
Financial requirement (GEM)
• Must satisfy the cash flow test
77
Cash flow test (GEM)
• Cash flow from operating activities must be of at least
HK$20,000,000 in aggregate for two financial years
Positive Cash flow from operating
activities
Not less than HK$20
Million
Year
2012
2013
78
Number of newly-listed companies
on the GEM of HKEx
Number of New Companies
Source: Fact Book 2012, HKEx
Year
79
Size of funds raised from newly-listed
companies on the GEM
HK$ Million
Source: Fact Book 2012, HKEx
Year
80
Activities 6 - Differences in the Listing
Requirements of MB and GEM
• Divide students into groups of four or five to
discuss the differences in listing requirements
of MB and GEM. Fill in the table on the
students worksheet.
81
Conclusion
• Fund raising through listing
• Listing requirements of MB and GEM
82
The End
83