Understanding the Factors Affecting Share Prices

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Understanding the Factors Affecting Share Prices

2 December 2014

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Disclaimer for presentations

 This presentation is intended to provide a general overview for information and

educational purposes only and is not a comprehensive treatment of the subject matter.

The information is provided generally without considering specific circumstances and should not be regarded as a substitute for professional advice. The Investor Education Centre (“IEC”) has not advised on, passed on the merit of, endorsed or recommended any of the products/services or types of products/services referred to in this presentation.

Readers/Audiences should seek professional advice if they consider necessary.

 The IEC endeavours to ensure that the information contained in this presentation is accurate as of the date of its presentation, but the information is provided on an "as is"

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 Supported by the four financial regulators and the Education Bureau

 Aims to improve financial literacy in Hong Kong

 Equip the general public with skills and knowledge to make informed financial decisions and manage their money wisely

 Provide comprehensive, credible and impartial financial

information, tools and education resources

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Some basics...

 Two forms of capital: Equity (share) & Liability (debt/loan)

 A share represents some ownership in a company.

 Ownership in a company entitles a shareholder to:

• Receive dividend (part of the company’s profit)

• Vote on major issues of the company

• Receive money in case of sale of company/business/assets (e.g.

M&A, liquidation)

Others

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 Shareholders have lower priority claim on a company’s assets than lenders:

• Interest paid before dividend

• Debts/Loans repaid first in case of company restructuring or liquidation. Shareholders get residual money

 Share price reflects the economic value of these entitlements

 Share price reflects EXPECTED FUTURE

Some basics...

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 Investors estimate the value of dividend stream and expect a future share price

Period 0 1 2 3

Market Price

Dividend Stream

4 5

……

Expected Share Price

 Share price is driven by estimation of dividend and expected future share price, i.e. “return”

About Share Price…

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 Return

Single Period Holding Period Return (HPR) = CF

1

+ (P

1

– P

0

) P

0

where HPR : Holding Period Return P

1

: Ending Price

P

0

: Beginning Price

CF

1

: Cash Flow (Dividend) during Period One

CF

1

P

0

(P

1

– P

0

) P

0

Component 1: Income Component 2: Capital Appreciation

About Share Price…

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Risk

 Most investors are risk averse, thus prefer “Steady Eddie” to “Volatile Joe”

 Investors demand higher return for stocks with volatile business performance

About Share Price…

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Stock valuation

• Common matrixes: price/earnings ratio (P/E), price/book ratio (P/B)

• P/E: If earnings/per share = $1, share price = $12, P/E = $12/$1 = 12x

• Factors affecting valuation of stock:

• Business prospects / growth

• Profitability

• Size of company

• Stability and predictability

• Management quality and corporate governance

About Share Price…

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Factors Affecting Share Prices

Supply vs Demand

Scenario share price

buying power < selling power  selling power > buying power 

 Why buying power  selling power?

• Different investors have different estimates

• Different investors require different returns

• Investor-specific reasons, e.g. liquidity needs

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Share Price Corporate

Activities

Market Profitability

Others

Factors Affecting Share Prices

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Share Price Corporate

Activities

Market Profitability

Others

Factors Affecting Share Prices

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Profitability – Company Performance

Improved Profitability (Sales / Costs)

Competition (Business / Capital Market)

 Corporate Governance

 Red Flag

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General Economy / Business Environment

Government (Political / Legal / Economics)

Overall Political Environment

 Social Changes

 Costs of Input

Sector Business Prospects

Profitability – Macro Factors

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Share Price Corporate

Activities

Market Profitability

Others

Factors Affecting Share Prices

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 Market Liquidity

Market Interest Rate

Market – Macro

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 Addition to / Removal from Stock Index

 Investment rating by research analysts

Market – Intermediaries

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 Movements by Substantial Investors

 Market Sentiment

Speculation

 Insider Trading

 Stock Manipulation

 Derivative Products

Market – Investors

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Share Price Corporate

Activities

Market Profitability

Others

Factors Affecting Share Prices

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Unexpected Dividend Payout / Change in Dividend Policy

Ex-dividend

Scrip Dividend / Bonus Share

• Share Split / Consolidation / Buy-back

• Privatization

• Mergers and Acquisitions

Corporate Activities

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Share Price Corporate

Activities

Market Profitability

Others

Factors Affecting Share Prices

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• Natural disasters

Others

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