Securities and Futures Commission

Teachers Workshop Stock Module Elementary

Overview of Stocks

Definition A certificate representing a unit of ownership in a company

Classification : Ordinary vs. Preferred vs. Deferred stock

Role of a Stock Exchange

Go public A venue for raising funds

Companies

PRIMARY MARKET

Stock Exchange Investors

An open and public market for exchanging stocks SECONDARY MARKET

Stock Market Primary Market

There are two markets on the SEHK

Main Board: For more established companies with previous trading and profit records

Growth Enterprise Market: For growth companies that may not have a track record of profits

Stock Market Primary Market

Roles of financial institutions Sponsors Underwriters Investors How to subscribe for IPO shares? White vs. Yellow vs. Pink application forms

Subscription & Distribution of IPO Shares

Application Form Target investors In which form How to distribute the IPO shares Registered in whose name Shareholder status

White

Investors who Physical share prefer to have certificate shares registered in their own name Investors who Immobilised prefer to have form their shares entrusted to their intermediary Staff of the tobe-listed company only Physical share certificate

Normally sent to The applicant applicant by mail

Legal owner

Yellow

Credit the intermediarys account at CCASS

HKSCC Beneficial owner (Nominees) Ltd.

Pink

Normally sent to The applicant applicant by mail

Legal owner

Stock Market Secondary Market

Order routing

Stock brokers (Non- Exchange Participants)

Placing order

Order execution

Stock brokers (Exchange Participants)

Order confirmation & settlement Custody, clearing & settlement

Investors

SEHK

Trade data Investor Participant A/C (Optional)

HKSCC

Secondary Market SEHK

Operates the trading system AMS/3 Automatic order matching Administers the Trading Rules and monitors compliance by its Participants Disseminates stock market information to the market via information vendors

Hong Kong Securities Clearing Company Limited

Clearing and settlement via CCASS under an immobilised mode Settlement cycle : T+2 at brokerage level Investor Participant Account: a stock custody account for investors

Stockbrokers

The intermediation role Must be licensed by SFC A SFC licence is not a guarantee of future performance or quality of service Range of services: Cash, margin, discretionary account Execution-only, other value added services (e.g. research) On-line trading

Listed Companies

Comply with the Listing Rules On-going disclosure obligations Price-sensitive information Financial information Annual, interim, quarterly (only for GEM companies) reports Corporate actions Notifiable transactions, some may need shareholders approval

Listed Companies: Accountability to Shareholders

Key factor: Corporate Governance Post-Enron era Accounting issue Company transparency Conduct of senior management, directors manage the business instead of the numbers

Share Registrars

Investors

Listed Companies

Maintain the share register of a listed company Help a listed company to issue share certificates, distribute dividend and corporate documents to shareholders, etc.

How to be a Smart Stock Investor

Find the right broker Deal properly and exercise your consumer rights Bank on facts, not rumours Know your rights as a shareholder Understand the risks of stock trading

Finding the Right Broker

Check if the brokerage and account executive are licensed with the SFC Public register Details of licensee records, including any licence conditions, 5-year disciplinary records Beware of boiler-room operators Understand the brokerages range of services and check the fees and charges

Stock Trading Services: The Myths & The Truth

The Myths The Truth Cannot choose the language of the The client agreement has to be in client agreement the language you prefer No record of the client agreement The brokerage should give you a signed copy of the client agreement Settlement is always on T+2 basis T+2 only applies to brokerages at CCASS. At the client level, settlement terms depend on the arrangement stated in the client agreement

Margin Trading Fallacies

Fallacy There is always a prior notice before the brokerage cashes in your shares in your margin account when there is a margin shortfall. You have a say on which shares to be disposed of. Truth Subject to the terms of the client agreement, normally, it is not necessary to have prior notification. Brokerage has the discretion to pick which stock to sell.

Margin Trading Fallacies

Fallacy Your shares in your margin account are not subject to any liquidation risk as they are more than sufficient to cover the margin requirement. Your shares are not at risk as you never borrow from the brokerage even though you have a margin account. Truth Depending on the terms of the authorisation which allow the brokerage to re-pledge your shares for its loan at banks and the pooling arrangement, you may not get back your shares if your brokerage becomes insolvent.

Matters Vital in Dealing With Your Broker

Read the client agreement carefully Understand the trading and settlement procedures Place your orders clearly Always check your contract notes and account statements Settle your trades directly with the brokerage, never deposit money into the account executives personal bank account or issue a cheque payable to the executive

Know Your Investments

Read the prospectus before you subscribe for a new stock Read annual reports, shareholder circulars and company announcements to keep yourself up-todate of the companys development Dont chase rumours Herd investing is not smart investing

Your Rights as a Shareholder

Information rights Voting rights Pre-emptive rights Rights issue Entitlements Dividend (cash / scrip), bonus shares, subscription warrants

What are the Major Risks of Stock Trading?

Higher expected return, higher risk Watch out for possible risks: Price risk Business risk Liquidity risk Corporate misgovernance Brokerage failure Pooling risk of margin account Investment scams

Regulatory Structure

Licensed Corporations & Individuals (Stock brokers, Investment Advisors, etc)

Takeovers & Share repurchases Hong Kong Exchanges & Clearing Ltd

All participants in trading activities

Investment Arrangements

Stock Exchange of Hong Kong Ltd.

Hong Kong Futures Exchange Ltd.

SEHK Options Clearing House Ltd.

Hong Kong Securities Clearing Company Ltd.

HKFE Clearing Corporation Ltd.

Listing Matters, Exchange Participants

Exchange Participants

Clearing Participants

Clearing Participants

Clearing Participants

How SFC Regulates the Stock Market

A SFC Licensee

Licensing

Intermediaries Supervision

Enforcement

Investor Education

Policy Making

Regulations on Listed Companies

Licensing & Intermediaries Supervision

Single Licensing Regime under SFO 9 Regulated Activities Licensed Corporations, Representatives and Responsible Officers Registered Institutions Risk-based supervisory approach Monthly returns on Financial Resources Rules requirements On-site inspections Broker Fidelity Insurance Scheme

Regulations on Listed Companies

Regulate takeovers, mergers and share buy-backs Dual filing mechanism under SFO Extended powers to inspect documents of listed companies connected parties under SFO Oversee SEHKs role as the front-line regulator of listing-related matters Ensure HKExs own compliance with Listing Rules

Enforcement

Monitor unusual market movements Investigate and take action against mark malpractice (e.g. market manipulation, insider dealing, intermediary misconduc listed companies suspected prejudicial o fraudulent transactions)

Investor Education

Help investors get the facts Highlight the pros and cons of different financial products and services Give health warnings and explain the risks Empower investors to protect themselves

Questions & Answers