Global Financial Market
The global financial crisis of 2007 proved how important is stock market to the global economy. This report will outline the importance of stock market specifically, the importance of its primary and secondary functions. It is the goal of this report to focus on Hong Kong Stock Exchange, Asia’s second largest stock exchange in terms of market capitalisation.
Stock market is definitely a critical component of a country’s economy. It plays an important role in the growth of industry and commerce of a particular country, eventually influencing the overall economic condition of that country to great heights. Needless to say, this is the reason why the state and government, the industry itself and the central bank of a country watch the events on the stock market as they unfold. Not only on the industry’s point of view, the stock market is also an important aspect of the economy from the investor’s point of view (Brigham and Houston, 2009).
A company seeking to raise funds for a strategic undertaking like business expansion such as new product or market development, probably, the ways with which the company will utilize are taking a loan from a suitable financial organization or issuing shares through the stock market. With this, the stock market is also critical for businesses since it is a key source in raising funds for strategic purposes (Arouri et al, 2010). Issuing shares to the investors is processual however. The company needs to be listed in a stock exchange. With the primary market role of the stock market, the business may be able to issue shares and acquire funds for any business requirement that it may want to pursue (Abraham et al, 2008).
When enlisting in a stock exchange, there are specific rules and regulations that a company must comply with. A company needs to fulfil criteria in issuing stocks and going public (Arouri et al, 2010). For those companies that are already listed in a stock exchange, they can easily issue more shares that the public may comprehend so that they may collect more business funds. On the other, if it is first time for the company to go public, it needs to start with IPO. IPO stands for initial public offering. Either way, companies need to go through the process by means of the stock market (Arouri et al, 2010).
Generally, this is the primary function of the stock market. The stock exchange plays a pivotal role to support the growth of industry and commerce (Brigham and Houston, 2009). It is not surprising then that the rising stock market is considered as a good sign for the development of industrial sector, and thus a growing economic condition and prospects for that country (Abraham et al, 2008).
When it comes to the investors, the stock market plays a secondary function of being a common platform where the buyers and sellers of stocks listed at the stock market meets. As such, the stock exchange is also a venue where retail and institutional investors buy and sell stocks. In fact, the secondary function is a support to the primary function since the stock market traders are the ones who raise the fund for the business through stocks investment (Abraham et al, 2008).
In investing in any stock or trading in the stock market, investors need to pass through stock brokers. These are the people who execute buying and selling orders of the investors in reality and settling the deals for the purpose of keeping the stock trading alive. Brokers thereby act as middlemen between stock buyers and stock sellers (Abraham et al, 2008). Once the former place his or her buy order, it is the responsibility of the broker to find the latter and close the deal. These activities occur at the stock market, determining the demand and supply of a company’s stock as well as the price of a particular stock that a company makes publicly available (Arouri et al, 2010).
Evidently, the stock market provides a venue for business to acquire needed funds to boost the business and an avenue for investors to acquire stocks through stock trading (Abraham et al, 2008). For one, it is the stock market’s inherent ability to make the stocks a liquid asset since it makes possible selling of stocks at any given point of time, getting back the investment along with its profit (ROI). The process makes the stocks more liquid in nature and thus attracting more investors to stock trade in the stock market (Brigham and Houston, 2009).
Where it comes to stock trading, there is a concept that works, but the question is: how can the stock market’s primary and secondary functions hold relevance to mature markets like Hong Kong stock exchange?
Today, Hong Kong is considered one of the major international financial centres worldwide. Nevertheless, its financial markets characterised by high degrees of liquidity. The government itself provides a favourable environment within which the businesses operate. For one, it emphasises its low and simple taxation policy as well as rule of law and fair market. With this, the market can be easily accessed even by foreign businesses more so since there are no restrictions in terms of capital flows into and out of the region. Also, there are no apparent exchange controls (FSTB, 2011).
Hong Kong’s stock market is considered as the fifth largest stock market worldwide and the second largest in Asia when it comes to market capitalisation (as of September 2012). Hong Kong stock exchange is very active when it comes to IPO (FSTB, 2011). In fact, it is considered as the most active since 2009 up to 2011 considering the funds that it was able to collect during that period. At the end of September 2012, there are 1,533 companies listed in the stock exchange with a total market capitalisation of HK$19,648.6 billion (FSTB, 2011).
In 2011, big waves of IPOs came to Hong Kong particularly in December which makes the stock exchange one of the leading global IPO market based on IPO funds raised worldwide. This is because more and more western companies are relying on the Hong Kong stock exchange to reach more Asian investors (Ernst and Young, 2012). See tables below:
Table 1 Key Global IPO Statistics (Ernst and Young, 2012)
Table 2 Global IPOs by Stock Exchange (Ernst and Young, 2012)
This is not surprising since Hong Kong is increasingly becoming a market of choice of European luxury goods as these companies take their IPOs to Hong Kong (Ernst and Young, 2012). This might have an impact on long term sustainability of the economy however. It would be advisable to see the stock market to become more local wherein more local companies are being listed to the stock exchange since the liquidity of these local markets increases as well as the pool of available grows more rapidly.
Further, Hong Kong is also considered as one of the most liquid markets in the world. It is considered as the largest asset management centre in Asia, attracting more international investors than local investors. The combined fund management is HK$9,038 billion in 2011. It is also considered as a regional centre for portfolio management activity. As of December 31, 2011, the net asset value of trusts and funds totalled around HK$7,908.2 billion (FSTB, 2011).
While the mainland Chinese markets performed poorly in terms of equity, this cannot be said for Hong Kong’s. In fact, Hong Kong is expected to increase in terms of valuation next year (Ernst and Young, 2012). This is despite the fact that the valuation of stocks in Hong Kong is different. An investor will find the price of the stocks in Hong Kong as extremely low. Majority of the stock trades with less than $5 value. In western stock exchanges, these prices of stocks are not even considered since they signify an unstable market. This is quite normal in Hong Kong stock exchange though more so for the largest and the most stable companies.
Yet another difference of Hong Kong stock exchange is that, other than the low cost of stocks which is perhaps the reason why a boost in the IPOs is apparent, the stocks are sold in broad lot sizes (Live Stock Working Group, 2013). As such, there are a number of stocks in a lot, and hence these are traded in multiples. The number of shares in the broad lot varies from stock to stock also. When trading, the exchange broker will have to make the investor aware of the broad lot size aside from the price of the stock (Live Stock Working Group, 2013). This makes Hong Kong stock exchange complicated, but this report can only assume that the investors themselves have already gone used to the process considering the statistics of exchanges conducted from years 2009 to 2011.
Hong Kong Stock Exchange has a peculiar setup. Nonetheless, this was not considered as a hindrance for businesses to turn their IPOs to this stock market as well as for investors (local and foreign, individual and institution) to invest on such.
Abraham, A., Glynn, J. & Murphy, M. (2008). Accounting for Managers. Cengage Learning EMEA.
Arouri, M. E. H., Jawadi, F. & Nguyen, D. H. (2010). The Dynamics of Emerging Stock Markets: Empirical Assessments and Implications. Springer.
Brigham, E. F. & Houston, J. F. (2009). Fundamentals of Financial Management. Cengage Learning.
Ernst and Young. (2012). Global IPO trends of 2012 – Prepare early, move fast. Ernst and Young. Retrieved on 23 January 2013, from http://www.ey.com/Publication/vwLUAssets/Global_IPO_trends_2012/$FILE/Global_IPO_trends_2012.pdf.
Financial Services and The Treasury Bureau (FTSB). (2011). Hong Kong: The Facts – Financial Services. Information Services Department.
Live Stock Working Group. (2013). Hong Kong Stock Exchange. Retrieved on 23 January 2013, from http://www.livestockworkinggroup.org/hong-kong-stock-exchange.php.