Basics of Personal Financial Management – Stock Trading as an Investment

1. Basics of Personal Financial Management – Stock Trading as an Investment Lesson 1: Stock Trading in Hong Kong and Stock Price (Part I)

2. Why trading stocks? • From Investor’s Perspective:- • Accumulation of wealth • Receiving dividend income • Asset allocation • From Company’s Perspective:- • Raise funds

3. Stocks • Represent the share of ownership of a company and a claim on its assets and earnings • Holders of stocks are called stockholders

4. Activity 1-Disadvantage of buying stock • What are the disadvantages of buying stock instead of putting your money into savings accounts.

5. Flow of stock trading and settlement Order execution Placing order via phone or internet Stock brokers (Exchange Participants) Order confirmation & settlement Custody, clearing & settlement HKEx Investors Trade data Investor Participant A/C (Optional) HKSCC

6. 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

7. 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)

8. 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

9. 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)

10. Hang Seng Index from Jan. 1993 to Dec. 2013 4 3 2 1

11. 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

12. 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

13. 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

14. 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

15. Example – Hong Kong GDP Vs. HSI GDP +9.8% GDP -2.8% HSI from 1.1. 2006 to 31.12.2009

16. Example – Hong Kong GDP Vs. HSI • Strong economic growth rate -The HK GDP growth rate was 9.8% in 2007* => Hang Seng Index went up • 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

17. General economic condition • Examples of factors affecting general economic conditions:- • Employment rate • Statutory minimum wage • Consumption / consumers’ confidence • Investment in infrastructure

18. 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

19. 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

20. The End

21. Basics of Personal Financial Management – Stock Trading as an Investment Lesson 2: Stock Price (Part II)

22. 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

23. Interest rates • Government intervention affects interest rates

24. 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?

25. 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

26. Industry prospect • The prospect of the industry depends on its Industrial cycle: • Early stage • Growth stage • Mature stage • Decline stage • Usually, when there is new technology/products developed or new lifestyle/trends formed, its related industries will experience high growth rate

27. 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

28. Company performance • Company performance: • Earnings • Management

29. 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

30. 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

31. Company performance- Management • Competency and quality of Management • Appropriate management strategies can improve profitability and operating efficiency by:- • Increasing sales • Reducing costs

32. 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

33. 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%

34. 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

35. 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

36. Activity 4 • Based on the above information: 1) Compute the P/E ratio of HSBC ; and 2) Compute the dividend paidout ratio of HSBC .

37. 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

38. 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

39. Conclusion • The following are factors affecting stock prices • Interest rates • Industry prospect • Company performance • Dividend policy • Speculation

40. The End

41. Basics of Personal Financial Management – Stock Trading as an Investment Lesson 3: Main Board (MB) and Growth Enterprises Market (GEM)

42. How many stock exchange(s) is/are there in Hong Kong?

43. 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

44. Roles of HKEx • Frontline regulator of central securities and derivatives • Ensure orderly and fair securities and derivatives markets Source: HKEx’s website

45. Functions of HKEx • To investors • Make investment • Gain protection • Receive information • To listed companies • Raise capital • Gain credibility • Get valuation

46. 10 stock exchanges with largest market capitalisations at year-end 2011 and 2012 Source: World Federation of Exchange 2012 Market highlights published on 22 January 2013

47. Two separate boards HKEx Operates Main Board (MB) Growth Enterprise Market (GEM)

48. 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

49. 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

50. 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)