Stock exchanges are organized markets for trading securities like stocks and bonds. They allow individuals and companies to raise capital and give investors opportunities to invest. When investors buy and sell securities on a stock exchange, stockbrokers act as intermediaries. Regulators monitor stock exchanges to ensure fairness and protect investors.

1. Stock Exchanges Jobi mathai S3 MBA

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 …… Ab Ltd.

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. 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. Process of securities trading 1. An investor places a _____________ with the stockbroker. market order Investor Stockbroker

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. 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

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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.

15. 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

16.  _______ 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.

17. 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

18. 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

19. 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

20. 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

21. 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 .

22. 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

23. 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 .

24. 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%

25. 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%

26. 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

27. 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

28. 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

29. 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 +

30. 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