Chapter 4 Stock Trading as an Investment

I bought the stock of a smartphone company and its stock price increased greatly after it announced a
new smartphone model

Financial Management
n.d.
 Key concepts

• stock price
• Hang Seng Index
• Stock trading
• economy
• university student
 Highlights

• Four university students majoring in finance bought some stocks last month to earn a return
• I bought the stock of a smartphone company and its stock price increased greatly after it announced a new smartphone model
• The Hang Seng Index (HSI) is computed from the market of all its constituents, with a different weighting assigned to each
constituent stock
• The movements of stock prices tend to follow that of the HSI in general
• All of the HSI constituents are listed on the Main Board of Hong Kong Exchanges and Clearing Ltd (HKEX)
 Hang Seng Index

Four university students majoring in finance bought some stocks last month to earn a return.
The bank I invested in announced a huge dividend, so its stock price increased sharply.
I bought some US stocks, but US stock prices dropped due to political issues.
I bought the stock of a smartphone company and its stock price increased greatly after it announced a new smartphone model.
Which of the following factors would cause the stock price of a company to rise or drop?
The sources of return from stocks include dividends and capital gains.
Capital gains on stocks are directly influenced by stock prices.
We will only discuss several major factors that affect stock prices.
 Economic conditions

Investment decreases.
Demand for goods and services drops.
I will pass. My salary was reduced. I have to cut my spending.
Economies around the world are closely connected.
Stock markets around the world often rise and fall together.
Borrowing involves interest costs.
Firms need to pay more interest when they borrow money to finance their activities.
The opposite happens when interest rates go down.
 Political situations

Industrial factors affect the stock prices of most firms in a particular industry.
Not all firms in the same industry will be affected by an industrial factor.
Their stock prices tend to move up and down together.
Government policies regarding an industry are a common industrial factor which affects industrial prospects
 Industrial factors

The stock prices of most firms in that industry rise.

The opposite happens when industrial factors result in poor industrial prospects.
For example: An oil pipeline network is damaged by an earthquake.
Firm-specific factors are factors that affect the stock price of a particular firm
 Firm-specific factors

Firm-specific factors are usually related to the following areas: of a firm.

Company performance and dividend policy are two major firm-specific factors affecting stock prices.
A company’s performance can directly influence its stock price.
Profits increase and it would have good prospects.
If a company performs poorly, its stock price will decrease
 Company performance

Apple cut the production target for its iPhone X by 50% due to disappointing sales.
Prada’s stock price rose by more than 14% after its sales turned positive after four years.
Dividends and capital gains are two major sources of return from stocks.
The dividend policy of a company can have a significant impact on the company’s stock price
 Dividend policy

When a company pays more dividends, its stockholders earn more money.
T he stock become a more attractive investment.
More investors will want to buy it.
The company’s stock price tends to increase.
The opposite happens when dividend payouts decrease.
Stock prices can be affected by speculation.
People who engage in speculation aim to make a profit by short-term trading.
They buy stocks when they predict stock prices will rise, and sell stocks when they predict stock prices will fall.
Normal speculative activities should not create any unusual stock price movement.
Excessive speculative activities may affect stock prices greatly
 Other factors

When there is unexpected negative news or rumours about a company or stock market, investors predict that the stock price(s) will
fall.
You may encounter MCQs asking you to determine which factor(s) would affect the stock price of a certain company.
Which of the following will affect the stock price of a listed car manufacturer?.
(1) The company announces a global recall of a certain car model (3) Fuel price.
All three factors will affect the stock price of the listed car manufacturer.
If the question asks which factor(s) would cause a company’s stock price to increase or decrease, we have to analyse the effect of
each factor on the company’s profitability and prospects
If it improves a company’s profitability or prospects, it will push up the company’s stock price.
 Market

HKEX has two platforms or markets for companies to list their stocks: The Main Board.
There are many more companies listed on the Main Board than on GEM.
The two platforms can be compared in terms of their listing requirements, target companies and investment risk
 Investment risk

Companies listed on the Main Board have passed a profit or revenue test.
They have a certain level of profitability in general.
Stock prices tend to be more stable and are less likely to drop sharply.
There are no profit or revenue requirements for companies listing on GEM.
While they may experience rapid growth, they are more likely to suffer a huge loss and go bankrupt.
Stock prices on the platform are more likely to drop sharply.
It mainly targets small and medium-sized companies.
It provides a channel for companies to list their stocks in Hong Kong.
 What is a stock market index?

It is useful for investors to understand the trend in stock prices on a stock market.
A stock market index is an indicator of the overall performance of a stock market.
It is computed by selecting a smaller group of listed stocks which can accurately reflect the general price movements on the stock
market
 The most commonly used stock market index in

There are a number of stock market indexes that reflect stock market performance in Hong Kong.
Hang Seng Index (HSI) is the most commonly used.
Some general facts about the HSI: Facts about the Hang Seng Index (HSI).
Comprises the largest and most liquid stocks listed on the Main Board of HKEX
 Features of the HSI

The HSI is computed from the market of all its constituents, with a different weighting assigned to each constituent stock.
To be eligible as an HSI constituent, a company must be a non-foreign company which is financially sound.
As the market of stocks changes, HSI constituents are changed from time to time.
Cathay Pacific, which had been a constituent for 31 years, was removed from the index in December 2017.
To better reflect the price movements of the major sectors of the Hong Kong stock market, four sector sub-indexes were created.
They include finance, utilities, properties, and commerce and industry.
All of the HSI constituents are classified into these four business sectors
 Findings

Prada’s stock price rose by more than 14% after its sales turned positive after four years
 Importance of the HSI

The HSI includes the largest and most liquid stocks on the Hong Kong stock market. Reflect overall stock market performance.
The movements of stock prices tend to follow that of the HSI in general.
The HSI can help investors better understand general price movements on the Hong Kong stock market.
For understanding general price movements on the Hong Kong stock market.
Investors can compare the performance of the Hong Kong stock market over time.
The HSI can serve as a benchmark for evaluating the performance of particular stocks in Hong Kong.
By comparing the price movements of particular stocks to trends in the HSI.
The Hang Seng Index (HSI) measures the general performance of stocks listed in Hong Kong and other parts of China.
The HSI only measures the general performance of stocks listed in Hong Kong.
The HSI can help investors compare the performance of the Hong Kong stock market at different points in time.
All of the HSI constituents are listed on the Main Board of HKEX
 Study subjects

4 university students

Four university students majoring in finance bought some stocks last month to earn a return