Frequently Asked Questions 
31/08/2009 
 

Chapter 6 Products - Securities Market

6.2

Equity Securities

 

6.2.1    

What are equity securities?  What are the differences between ordinary shares and preferred shares?

Equity securities, generally referred to as shares, comprise ordinary shares and preference shares.  Most of the equity securities listed on the Stock Exchange (the Exchange) are ordinary shares, which account for most of the turnover of the Exchange.

Ordinary shares and preferred shares are equity shares issued by a company to shareholders.  Ordinary, or common, shareholders (ie holders of ordinary shares), being owners of the company, have voting rights and receive dividends at the discretion of the company.  However, the payment of dividends is not mandatory, even if a company records a profit in the year.

Preferred shareholders are entitled to a preferential distribution out of profits prior to any distribution to the ordinary shareholders.  Preferred shareholders have no voting rights and receive fixed dividends (ie the dividend does not increase, even if the company's profit increases).  Preferred shareholders also have a claim on corporate assets in the event of liquidation which ranks ahead of ordinary shareholders but behind that of the company's creditors.  Preference shareholders may receive additional dividends if the profits are sufficient.  Cumulative preference shares carry forward the right to profits to following years if there are insufficient profits to pay the holders in any one year.

 

6.2.2

What factors would affect share price movements?  What risk factors should investors consider before buying shares?

There are numerous factors that may affect share prices, including macro-economic factors such as changes of exchange rates and interest rates as well as costs of capital, etc.  Business cycles of different industries, company profits, investors’ expectations and supply and demand in the market also will affect share prices.  In addition, investors must remember that active trading in listed securities cannot be guaranteed.  Investors should consider their risk appetite and objectives cautiously before making an investment decision.

 

6.2.3

What are P/E Ratio and dividend yield?

The Price Earnings Ratio (P/E Ratio) is the multiple of earnings at which a share is selling.  It is determined basically by dividing the current share price by the earnings per share.  P/E Ratio is usually computed with the company’s earnings from its most recent financial year but can also be computed with the estimated earnings for its next full year results.  A higher multiple, or P/E Ratio, means investors have greater expectations for future growth and are willing to pay a higher share price.  It can be useful to compare the P/E Ratio of a company to another in the same industry, to the market in general or to the company’s own historical P/E Ratios.

Dividend yield is the dividends per share in the most recent financial year as a percentage of the current share price. This provides a tool to compare the relative attractiveness of various dividend-paying stocks or other investments such as bonds or bank deposits.

 

6.2.4

What is ex-dividend?  How does it affect the share price?

Ex-dividend means without dividend entitlement.  Dividends are paid on a set date to shareholders recorded in the books of the company on a specified date, known as the record date.  Because of the T+2 settlement arrangement, shares go ex-dividend, which means that investors who buy on or after the day, known as the ex-dividend date, are not entitled to the dividend declared before the ex-dividend date.  Other factors remaining equal, the share price will normally drop on the ex-dividend date by an amount equivalent to the amount of the dividend.

 

6.2.5

What are the differences between the par value, book value and market price of a share?

Par value is the face value of a share shown on the face of the share certificate.  Par value of a share usually has little relationship to its current market price.  Book value is the amount of net assets belonging to the shareholders of a company based on its balance sheet value.  A company’s book value might be higher or lower than the market price which is determined by, among other things, the supply of and demand for the shares.

 

6.2.6

What are the characteristics of securities traded under the Pilot Programme, which was introduced by HKEX in 2000?

Securities traded under the Pilot Programme have the following characteristics:

  • Listed on Nasdaq or the American Stock Exchange;
  • May include a number of Exchange Traded Funds;
  • Have no public offering in Hong Kong;  
  • Not regulated as listings on the Stock Exchange’s Main Board or GEM; 
  • Admitted into the Stock Exchange for trading only;   
  • Trading of Pilot Programme securities is regulated by Hong Kong laws and the Stock Exchange rules.  In particular, the securities are subject to the market manipulation provisions of the Securities and Futures Ordinance; and
  • In general, suspension and resumption of trading follows the decisions of the home market of Pilot Programme securities, but the Securities and Futures Commission and the Stock Exchange retain the right to suspend and halt trading and delist any security.