BAFS Study Notes: Stock Trading as an Investment
Hello everyone! Welcome to your study notes for "Stock Trading as an Investment". Have you ever heard people talking about the stock market on the news and felt a bit lost? Don't worry! This chapter is all about demystifying that world. We'll learn what makes stock prices change, where they are traded in Hong Kong, and how we can measure the market's performance. Understanding this is a great step towards smart personal financial management!
Factors Affecting Share Prices
Imagine a share price is like the price of a limited-edition sneaker. Many things can make its price go up or down. For stocks, it's the same! A company's share price can change every second based on many factors. Let's break them down.
1. General Economic Condition
This is about the overall health of the economy. If the economy is strong, people have jobs, are spending money, and businesses are doing well. This is usually good for most companies' share prices.
Example: During a strong economy, more people might travel. This could boost the profits of an airline like Cathay Pacific, and its share price might rise. If there's an economic recession, people spend less, and share prices might fall.
2. Political Factors
Political stability is very important for business. New government policies, elections, or international relations can create uncertainty or opportunity, affecting investor confidence and share prices.
Example: If the government announces a new policy to support technology companies, the share prices of those companies might increase. On the other hand, political instability can make investors nervous, leading them to sell shares and causing prices to drop.
3. Interest Rate
Think of interest rates as the "cost of borrowing money" or the "reward for saving money". Changes in interest rates, set by central banks, can have a big impact on stocks.
When interest rates go UP: Saving money in the bank becomes more attractive (more interest earned!). Some investors might sell their stocks (which are risky) and put the money in the bank instead. This can cause share prices to fall.
When interest rates go DOWN: Saving money in the bank is less attractive. Investors may look for higher returns elsewhere and buy more stocks, pushing share prices up.
4. Industry Prospects
This is about the future outlook for a specific industry. Some industries are growing, while others might be shrinking.
Example: The electric vehicle (EV) industry is seen as having strong growth prospects. So, companies in this industry might attract more investors, and their share prices could perform well. In contrast, an industry facing decline due to new technology might see its companies' share prices fall.
5. Company Performance
This is one of the most direct factors! How well is the company actually doing? Is it making a profit? Are its sales growing? Positive news about a company's performance usually makes its share price go up.
Example: If Tencent announces that its profits have doubled from last year, investors will be very happy and more people will want to buy its shares, increasing the price. If it announces a big loss, the share price will likely fall.
6. Dividend Policy
A dividend is a portion of a company's profits paid out to its shareholders. A company that regularly pays good dividends is often attractive to investors who want a steady income.
Example: If a company announces it will increase its dividend payment, investors see this as a positive sign of financial health, and the share price might rise. If they cut the dividend, it could signal problems, and the price might fall.
7. Speculation
Speculation is when investors buy or sell shares based on rumours or market sentiment (what they *think* will happen in the future), rather than on the company's actual performance. This can cause prices to change very quickly.
Example: If a rumour spreads that a tech company is about to be bought by a bigger company, speculators might rush to buy the shares, hoping for a quick profit. This sudden demand can drive the price up, even if the rumour isn't true.
Key Takeaway: Factors Affecting Share Prices
A share price is influenced by a mix of factors, from the big picture (economy, politics) to the company-specific (performance, dividends). It's never just one thing!
Stock Trading Platforms in Hong Kong
You can't just buy stocks at a supermarket. You need to go to a special, organised market called a stock exchange. In Hong Kong, the main one is the Hong Kong Exchanges and Clearing Limited (HKEX). The HKEX operates two main platforms, or "boards", for trading stocks.
Main Board
This is the main market for larger, well-established, and more profitable companies. Think of it as the "premier league" of the stock market.
Who's here? Big, famous companies that you probably know, like HSBC, MTR Corporation, and CLP Holdings.
Characteristics: These companies have a long track record of being in business and making profits. They are generally considered more stable investments.
GEM (Growth Enterprise Market)
GEM is designed for smaller, emerging companies that have high growth potential. Think of this as the "rising stars" division.
Who's here? Smaller companies, often in technology or innovation, that might not have a long history of profits but have exciting future potential.
Characteristics: These companies are considered higher risk because they are less established. However, they also offer the potential for higher returns if they succeed.
Quick Review Box
Main Board vs. GEM
Main Board: Big, stable, established companies (Lower Risk, Lower Potential Return).
GEM: Small, growing, emerging companies (Higher Risk, Higher Potential Return).
A small note: The syllabus says you don't need to know the specific rules for how companies get listed on these boards. Just understand the purpose and difference between them!
The Importance of the Hang Seng Index (HSI)
With thousands of companies listed on the stock exchange, how can we get a quick snapshot of how the market is doing overall? That's where the Hang Seng Index comes in!
What is the HSI?
The Hang Seng Index (HSI) is the main stock market index in Hong Kong. It tracks the daily performance of a selection of the largest and most actively traded companies on the Main Board.
Analogy: Think of the HSI as a "report card for the Hong Kong stock market". It doesn't show the grade of every single student (stock), but it averages the grades of the biggest and most influential students to give you a great idea of how the whole school is performing.
The companies included in the HSI are called "blue-chip stocks".
Why is the HSI Important?
The HSI has three main jobs:
It's a Market Barometer: It quickly tells us the overall direction and mood of the market. If you hear "The Hang Seng is up 300 points today," it means that, on average, the biggest stocks had a good day. It's a key indicator of investor confidence.
It's a Performance Benchmark: Investors and fund managers use the HSI to measure their own success. They might ask, "Did my portfolio of stocks do better or worse than the HSI this year?" It's a standard to compare against.
It Reflects the Economy: The performance of the HSI is often seen as an indicator of the health of the Hong Kong economy. A rising index can suggest economic optimism, while a falling index might signal concerns.
Key Takeaway: The HSI
The HSI is a vital tool that gives a quick, reliable summary of the stock market's performance, acting as a barometer, a benchmark, and an economic indicator.
Being a Smart Investor: Your Rights and Responsibilities
Investing is not just about picking winners. It's also about protecting yourself and being responsible with your money. As an investor, you have both rights and duties.
Your Rights as an Investor
Right to ask for the rationale behind a recommendation: If a bank or broker advises you to buy a particular stock, you have the right to ask them "Why?". They must be able to provide you with a reasonable explanation for their advice.
Right to file a complaint: If you believe you have been treated unfairly or given improper advice by a financial institution, you have the right to file a formal complaint with them and, if necessary, with regulatory bodies like the Securities and Futures Commission (SFC).
Your Responsibilities (Duties) as an Investor
Duty to understand the terms of a contract: Before you sign any agreement or open an investment account, it is your responsibility to read and understand all the terms and conditions. Don't just sign without reading!
Duty to monitor your own account: It's your money, so you need to keep an eye on it. You have a duty to regularly check your account statements and transaction documents to ensure there are no errors or unauthorized activities.
Memory Aid: Remember A.C.U.M.
To be a smart investor, remember your basic rights and duties:
A - Ask for reasons.
C - Complain if you are treated unfairly.
U - Understand what you sign.
M - Monitor your account.
And that's a wrap on Stock Trading as an Investment! It might seem like a lot, but by breaking it down, you can see it's all based on logical ideas. Keep reviewing these concepts, and you'll be on your way to mastering this topic!