Hong Kong Stock Market
Hong Kong Exchanges and Clearing Limited (HKEx) is the market operator of the securities trading and clearing systems. It consists of a Main Board and the Growth Enterprise Market (GEM) board for stock trading. In addition to stocks, HKEx’s cash market also provides the trading for derivative warrants, exchange-traded funds (ETFs), real estate investment trusts (REITs), equity-linked investments, callable bull/bear contracts (CBBCs) and debt securities. HKEx also operates a very active derivativesmarket, which includes the trading of index futures, stocks futures, index options and stock options. HKEx is regulated by the Securities and Futures Commission.
- You can phone your brokerage’s trading line or visit the brokerage.
- Some firms also offer on-line trading services, which allow orders to be routed into an exchange’s trading system in real time. But if the brokerage’s on-line service is an email-based system, you will only be using the email to place orders that are manually fed into the trading system, so the usual processing delays and human error may apply.
- Whichever method you use, it’s important you give accurate instructions. You must clearly give the stock name or stock code, the exact number of shares or the number of board lots you wish to trade, the type of order, and the price level you want.
- The type of order determines when and how your order will be executed. If you want price protection, you can use a limit order: this means the transaction takes place at a price equal to or better than the price you specify. If you want your order to be executed immediately, you can place a market order: in this case, the transaction will be executed at the best price available at the time your order reaches the market. Remember that this is what Carl did, and his problem was that he could not control the order price.
Ask the person you are dealing with to repeat your instructions to make sure there’s no misunderstanding.
- Once the details are confirmed, an order to trade Hong Kong listed securities is entered on the Stock Exchange of Hong Kong (SEHK)‘s Automatic Order Matching and Execution System (AMS/3). A matching order is executed automatically. If there’s no immediate match, your order joins a queue and waits its turn. When it is executed depends on the stock’s liquidity and the spread between your order price and the prevailing market price.
- Do not assume your order has been filled simply because the stock traded at the price you specified. Other investors’ orders at the same price may be in front of yours – if so, their orders will be matched first. Remember to ask your brokerage to confirm that your trade has been completed.
- With on-line trading, you need to distinguish between order confirmation (the order is confirmed but has not been executed) and trade confirmation (an order has been fully or partially filled).
Do not place another order if you are not sure whether your original order has been executed. Check with your brokerage first. Remember to cancel the original unexecuted order before placing a new one. Otherwise, you may end up either buying twice as many shares as you want or selling shares that you do not own.
- The pre-opening session adopts an auction mechanism. Orders are accumulated over a certain period and then matched at a single price called the final Indicative Equilibrium Price (IEP). This is the price at which the maximum number of shares can be executed from the matched orders.
- However, you can place an at-auction order or an at-auction limit order in the pre-opening session. If you want your order to be executed at the final IEP, you can place an at-auction order without specifying the price. But if you expect your order to be filled at a particular price or better, use anat-auction limit order. And remember that at-auction orders get higher priority than at-auction limit orders when matching takes place.
- When the pre-opening session ends, any unfilled at-auction orders will be cancelled while at-auction limit orders will be carried forward and queued as limit orders in the morning session.
During the morning and afternoon sessions, orders are matched in the order they are input based on the best price.
Brokerage commission is freely negotiable between the brokerage and the client. The brokerage may also levy settlement and related fees. You will have to pay other charges like stamp duty, a transaction levy and trading fee, and these are calculated on a percentage of the transaction value.
All brokerages must have an audio system to record client order instructions made by phone. The recordings should be kept for at least six months. Also, the orders should be time-stamped. A brokerage should prohibit its staff members from receiving client order instructions through mobile phones when they are on the trading floor, in the trading room, usual place of business where order is received or usual place where business is conducted. It should have a written policy in place to explain and enforce this prohibition.
However, where orders are accepted by mobile phones outside the locations mentioned above, the staff member should immediately call back to the brokerage’s telephone recording system and record the time of receipt and the order details. The use of other formats (e.g. in writing by hand) to record details of clients’ order instructions and time of receipt should only be used if the brokerage’s telephone recording system cannot be accessed.
In general, capital re-organization may include a reduction of share capital followed by a share consolidation.
Share capital reduction
Often, reducing a listed company’s issued share capital is effected by reducing the par value of each share.
The share capital and reserves of a company tell the net worth of a company. If a company has been operating at losses for sometime, it may have accumulated significant deficits such that the actual value of its assets may be far lower than the value of its issued share capital, therefore, the company may want to reduce its issued share capital so as to give a more realistic picture of its creditworthiness.
A listed company may conduct a share consolidation following the reduction in share capital to raise thepar value of each share. A share consolidation means consolidating a number of shares into a single new share. Sometimes, a company may also change its board lot size for trading on the Stock Exchange. Consolidation of shares decreases the number of authorised shares but proportionally increases the par value of each share. However, it does not affect either the authorized or issued share capital.
Since the par value of each share increases proportionally in a share consolidation, there is actually no change in the total par value of the holding of each shareholder.
Par value vs market value
It is important to note that the par value and market value of shares are not correlated. The par value is a fixed value predetermined by the company concerned, whereas the market value is a constantly changing value determined by market forces of demand and supply. Practically speaking, it is not possible for the two values to correspond with each other (except when the company has an initial public offering and it can fix the initial offer price), or to change simultaneously.
A takeover is when a company or person (bidder) makes an offer to acquire the voting shares of a company (target) with a view to controlling it. In Hong Kong, takeovers of public companies are governed by the Hong Kong Codes on Takeovers and Mergers (Takeovers Code).
One of the key rules of the Takeovers Code is that a person or group of persons acting together must make a general offer to buy the remaining shares in a company if: (i) it buys 30% or more of voting shares in the company; or (ii) it already holds between 30% and 50% of the voting shares and increases that holding by more than 2% in any 12-month period. This is known as a mandatory general offer.
A takeover may also be made by making a voluntary general offer (this happens when there is no obligation to make an offer under the Takeovers Code).
Takeovers can be conditional
Normally offers depend on the bidder receiving sufficient acceptances for it to obtain 50% or more of the target’s voting shares. If the bidder doesn’t get the minimum 50%, the offer will lapse. This is the only condition that may be attached to a mandatory offer.
If a bidder already holds more than 50% of the voting rights before the offer is made, the offer will normally be unconditional from the outset.
Under the Listing Rules, companies listed on the Main Board or Growth Enterprise Market (GEM) must first obtain the specific approval or general mandate given by shareholders (usually at a General Meeting) to the board of directors before they can repurchase their own shares. The Rules also provide for the number of shares, timing and disclosure of repurchases by companies. Shareholders can exercise their voting rights to vote for or against a share repurchase proposal or mandate.
Nothing could have affected non-shareholder investors more than the decrease in liquidity of the relevant shares in the market after a share repurchase. According to the supply and demand theory, a fall in supply may stimulate the share price to some extent. However, investors must not overlook other factors, such as the overall sentiment of the stock market, fundamentals of the company itself, which may also affect the performance of the share price.
“H shares” are foreign shares issued by enterprises incorporated in the Mainland, that are primarily listed in Hong Kong and traded in Hong Kong dollars.
Investors should note that the reform of the B-share market does not open the H-share market to Mainland residents. The B-share market is still totally segregated from the H-share market.State-owned enterprises (SOEs) which have issued B shares cannot issue H shares; the opposite also holds. However, SOEs can issue both A shares and H shares.
While A, B and H shares are shares issued by SOEs, there exists another important category of China play: the “red chip”. This label describes stocks in companies with business, assets, markets and ownership that have a strong Mainland orientation. Red-chip companies are not incorporated in the Mainland. The par values of their shares are expressed in currencies other than the RMB. There is another important difference between a red-chip company and a SOE listed in Shanghai or Shenzhen: normally, all of the shares in issue in a red chip are tradable (i.e. there is no segmentation of share capital as there is in the SOE). There is no subdivision between “domestic” and “foreign” shares in such companies either.
A “settlement instruction” refers to the transfer of securities between two accounts in the Central Clearing And Settlement System (CCASS). The service is usually used in the following circumstances:
- An investor wants to transfer his shares from one brokerage to another for custody.
- Holder of an Investor Account in CCASS has to transfer his shares to/from his brokerage for settlement purpose when shares are traded.
When a share transfer is made by means of a settlement instruction (SI), the parties to the settlement each have to issue a SI to the CCASS, stating the amount of shares to be transferred and the identity of the parties to the settlement, etc. CCASS will carry out the instruction and transfer the shares to the account of the designated recipient only when the information provided by both parties is matched.
As a share transfer effected by way of SI is a strictly commercial service, it may not be available at every brokerage, depending on individual company’s policy or other commercial considerations. Furthermore, before giving any SI, investors should find out from the CCASS and their brokerages about the fees charged for effecting a share transfer by this means.
Under existing legislation, the shares of listed companies can be freely traded by their holders. Shareholders of listed companies can, therefore, dispose of the shares they have in hand in any way they like.
At present, investors usually have their listed shares traded through brokerages on the Stock Exchange of Hong Kong in search of a better price and to save the trouble of looking for a buyer themselves. In such cases, both the buyer and the seller have to pay commission to their broker, the transaction levy, the trading fee, the investor compensation levy and the ad valorem stamp duty for the transaction.
If an investor chooses to have his shares traded off the Stock Exchange, both the buyer and the seller will dispense with paying the brokerage. However, they will have to fill in a deed of transfer stating the identity of the transferor (seller) and the transferee (buyer), the name of the stock, the quantity of shares and the transaction value. Furthermore, both the buyer and the seller will have to sign a contract note and pay the ad valorem stamp duty to the Inland Revenue Department (IRD).
At present, local investors who want to trade securities other than local stocks can generally place their trading orders in the conventional (i.e. telephone or fax) or the new (i.e. the Internet) way. Under the Securities and Futures Ordinance, a person who operates a securities business in Hong Kong has to apply for a licence from the SFC and be subject to the latter’s ongoing regulation, regardless of which jurisdiction’s securities are traded for their clients.
Investors who want to be protected by Hong Kong laws for their trades in foreign stocks have to make sure that they deal with a properly registered intermediary. Similar to the case of trading local securities, investors who intend to trade foreign stocks have to enter into a client’s agreement with the intermediary whereby the rights and obligations of both trading parties are specified. Investors also have to ensure that they will be issued with a contract note after each transaction and an account statement so that they can have a clear understanding of the account movements.
The share registrar of a listed company will issue a dividend warrant to all registered shareholders listed on the register of shareholders after the book close date. If scrip dividend is available for election, the dividend warrant will list out the details of the dividend payout, deadline for election and the measure to be adopted in the case of nil reply from shareholders, such as to pay out the dividend in cash or in shares. After collecting replies from shareholders, the share registrar will pay out cash or shares in accordance with the instructions of the shareholders on the dividend payout date.
If your shares are kept in the broker firm’s custody account in the Central Clearing and Settlement System (“CCASS”) (the settlement and clearing system operated by the Hong Kong Securities Clearing Company Limited), shares would be registered in the name of the Hong Kong Securities Clearing Company Nominees Limited (“HKSCC Nominees”). Therefore, if scrip dividend option is available, you will have to communicate your preference to the share registrar via your broker firm.
Many listed companies will recommend whether a final dividend will be paid when they announce their annual results. The dividend recommendation is then subject to voting by the shareholders at the Annual General Meeting before a listed company officially declares a dividend, meaning that it is possible for the proposed amount of dividend to be changed. Investors buying a stock based on the amount of final dividend recommended but not declared should bear this risk in mind.
Information about the dividend recommended or declared can be found at the share registrars of listed companies or on the website of the Hong Kong Exchanges and Clearing Limited. However, you must note that even if the shares with dividend declared are acquired before the dividend payout date, it does not necessarily mean that you will definitely receive the dividend payments.
Whether you can get the announced dividend depends on the date on which you acquire the relevant shares. Followings are the important dates you must note:
- “Book Close Date” refers to the date when a listed company suspends the updating of the Register of Shareholders. If a shareholder is holding physical scrip, the transfer of title procedure must be completed before the book close date so that the shares are registered in the name of the shareholder, otherwise dividend will not be paid to that shareholder.
- “Ex-Dividend Date” refers to two trading days prior to the first day of the book close date. Investors must acquire the shares before the ex-dividend date in order to be eligible for receiving the dividend payout. The share price will also be adjusted downwards on the ex-dividend date to reflect the impact on the share price as a result of the dividend payout.
- “Dividend Payout Date” refers to the date when dividend is paid out by a listed company.
Funds must be authorised by the SFC before they can be marketed in Hong Kong. They must meet the requirements of the Code on Unit Trusts and Mutual Funds (UT Code). This covers investment restrictions, the eligibility of the fund manager / custodian / trustee, information disclosure and operational policy. It is an offence to offer unauthorised funds to the public in Hong Kong unless an exemption applies.
The SFC offers investor protection by insisting on:
- Proper structure – An authorised fund should appoint a fund manager, trustee / custodian acceptable to the SFC.
- Well-defined investment – An authorised fund must follow investment guidelines and restrictions specified in the offering or constitutive documents. The fund should be liquid and diverse.
- Accurate and sufficient disclosure – An offering document containing essential information about the fund should be available to help you make an informed investment decision. A semi-annual report and an audited annual report must be published. Investors must be notified of major events, e.g. increase in fees, proposed merger or de-authorisation, within a designated timeframe. Marketing materials must not be false, misleading or deceptive.
- Other related requirements – These cover a fund’s daily administration such as price calculation, dealing procedures, charging of fees and other matters.
To verify whether a fund is authorised, call the SFC at 2840 9222 or check the “List of Investment Products” on the SFC website.
A fund’s offering document, often referred to as an explanatory memorandum or a prospectus, lists the investment objectives and restrictions, its characteristics, risk disclosure, fees, dealing procedures, conditions leading to deferral, suspension or even termination of the fund, as well as sources of further information. It should be available in both English and Chinese. An application form for subscription can only be distributed together with an offering document.
You place your orders directly to the fund house or your fund agent on any dealing day in person, by phone or through the Internet. Currently, most funds are dealt on a daily or weekly basis. Dealings are mainly on a “forward” basis, i.e. your subscription will be based on the fund’s NAV, calculated when the market closes on that same day. This is seen to be able to ensure that the price you pay accurately reflects the value of the fund on the day the order was placed. Funds that deal on a “historic” basis deal with the fund price based on the previous valuation day. When a market is particularly volatile, funds dealing on a historic basis would need to defer trading and re-calculate the price.
If redemption requests on any one dealing day exceed 10% of the total number of units / shares in issue, orders in excess of the 10% may be deferred to the next dealing day. In such cases, a fund may deal with the investors’ redemption orders on an equitable basis up to the 10% limit, with the outstanding requests carried forward to the next dealing day.
The concept of “Class B” funds is derived from the US to distinguish funds of different fee structures (commonly referred to as the “load”).
Under this concept, traditional funds are called “Class A” funds, which charge investors a few percentages of subscription fee upon their purchase, i.e. they are front-end load funds.
On the other hand, “Class B” funds are back-end load investments which require no upfront subscription fee. Thus, investors buying a Class B fund have 100% of their capital invested in the fund. However, they are charged a fee upon their redemption of that fund.
The redemption fee payable by Class B fund holders decline with the time they hold the funds. For instance, the redemption fee may start, say, from 4% in the 1st year and then down to 1% in the 4th year with an annual decrement of 1%. So, usually, the longer investors hold the Class B fund, the lower the redemption fee they have to bear. Investors may not even have to pay any load if they redeem their holdings after having been in the fund for over 4 years.
Dollar cost averaging means buying units in a fund periodically with a fixed sum, regardless of the condition of the markets of the fund’s underlying investments. For instance, you join a monthly savings plan offered by an intermediary and contribute a fixed amount monthly to buy units of a designated fund.
With this strategy, you may buy low or high. When the unit price rises, fewer units are purchased for the given amount of money. Conversely, more units are purchased for the fixed amount when the unit price drops. Normally, dividends distributed by the fund are reinvested to become part of your dollar cost averaging portfolio.
Advocates of this approach of fund investing believe that the impacts of the market’s up-and-down swings on investors are reduced. Moreover, in this way, investors do not have to time the market to make their subscriptions.
Futures contracts are derivative instruments. A stock futures contract represents a commitment to buy or sell a predefined amount of the underlying stock at a predetermined price on a specified future date.
When you buy a stock futures contract, you are holding a long position and have to buy the underlying stock on the final settlement date. However, you can choose to hold a short position by selling a stock futures contract – this means that you have to sell the underlying stock according to the contract terms.
Despite the diversity in futures contracts, they do share some common features. Also certain terms are frequently used in many exchange-traded futures contracts:
- Underlying asset: Assets underlying futures contracts can be quite varied. They include stocks, indices, currencies, interest rates, commodities, such as oil, beans and gold. HKEx futures contracts are financial futures mainly based on interest rates, gold, stocks and stock indices such as the HSI, H-shares Index.
- Contracted price: The price at which a futures contract is registered by the clearing house, i.e. the traded price.
- Contract multiplier: The weight that is multiplied by the contracted price when calculating the contracted value. With HSI and H-Shares Index futures, the contract multiplier is $50 per index point, whereas in a mini-HSI futures contract, it is $10 per index point. For HKEx stock futures contracts, this is one board lot of the underlying stock.
- Last trading day: The last day when a futures contract can be traded on an exchange.
- Final settlement day: The day when the buyer and the seller must settle the futures contract.
- Final settlement price: The fixed price determined by the clearing house and used to calculate the futures contract’s final settlement value. Multiplying the final settlement price by the contract multiplier gives the final settlement value.
- Settlement method: A futures contract can be settled by cash or by physical delivery of the underlying asset. All futures contracts traded on the HKEx (except for Three-year Exchange Fund Note futures) are settled in cash.
Generally, there are three main reasons for trading futures: directional trading, hedging and arbitrage.
If you expect the stock market to rally, you can opt for directional trading by buying a stock index futures contract. You make a profit if the final settlement price is higher than the contracted price when you bought the futures contract. On any day on or before the last trading day, if the going price of the index futures is more than the contracted price, you can realise your profit by selling the same futures contract to offset your original long position. On the other hand, if you think the market will fall, you can sell a stock index futures contract.
Hedging strategies are commonly used to offset any negative effects on an investor’s portfolio return. If you want to mitigate your loss in a falling market, then you can use a short hedge by shorting a stock futures contract. Or you can apply a long hedge to lock in the buying price for the underlying stock on a future date by buying a stock futures contract. If the stock price rises, you will be able to buy the stock for less than the going market price.
If you are trading in futures, you must remember to pick futures contracts in which the underlying assets correspond to your holdings. For example, HSI futures are not the ideal tool to hedge red chipswhich are not HSI constituent stocks.
Arbitrage allows you to earn profits by capitalising on unusual price discrepancies between the futures market and the underlying cash market. You can do this by executing opposite trades simultaneously in the two markets.
- At a premium: The futures contract’s going price is higher than that of the underlying asset.
- At a discount: The futures contract’s going price is lower than that of the underlying asset.
- Rollover: A client who has an open position in a futures contract approaching its last trading day closes that position and opens the same position in a futures contract with a later expiry date.
Whether you buy or sell a futures contract, you have to deposit an initial margin.
At the end of each trading day, your position is “marked to market”, or valued according to the contract’s market value at the end of the day. If the contract price moves against your view so the initial margin deposit falls below the maintenance margin level, your brokerage will normally issue amargin call. This means you will have to deposit additional money to restore the initial margin level. If you don’t do this, your brokerage may liquidate your position at market. You will have to bear any loss arising from the forced liquidation.
Transaction costs vary for futures traded on different exchanges. For futures trading on the HKEx, transaction costs include a brokerage commission (usually at a flat rate, chargeable each time a futures contract is bought and sold), an exchange fee, SFC levy ($1 per contract per side) and investor compensation levy ($0.50 per contract per side).
Suppose you have bought a commodity futures contract for directional trading and the price of the underlying commodity goes against your view, you can close your position to limit your loss. To close, you reverse an original position by taking an equal but opposite trade on the “same” contract. Normally by default, your brokerage should, on your behalf, give instructions to the exchange or the clearing house to net off your position. As a result, you will not have any outstanding position on the futures contracts.
But when there are difficulties in closing out a position, for example if there is “limit up” or “limit down” in a particular delivery month or if a market is closed for holiday, you may “lock” a position to offset the price risk associated with an open position.
An effective lock normally involves the taking of an equal but opposite trade on a “similar” contract (e.g. a contract with a different expiry date, or one traded on another exchange but linked to the same underlying assets) to your original position. If you hold a long position in a red bean contract for delivery in December 2002, to lock the position you may short a red bean contract for delivery in March 2003. This is different from “closing” a position, as you will hold a “long” and a “short” position in different futures contracts simultaneously. Depending on the policy of the brokerage you are using, you may have to put up margin deposits for each “long” and “short” position you maintain, although you may save on margin on subsequent contracts.
If you want to close out a position and are prepared to take the loss, if any, and if you are able to enter into an equal but opposite trade in the same contract, you should consider doing it. If you attempt to “lock” the position using the same contract and keep the long and short positions in the same futures contract simultaneously, the two open positions would need to be closed out subsequently and additional commission may be incurred.
Trading of futures contracts is available during the regular trading sessions: 9:15am to 12:00 noon and 1:00pm to 4:15pm in Hong Kong.
Starting from 8 April 2013, Hong Kong Exchanges and Clearing Limited (HKEx) will introduce an extended trading session for futures trading, known as After-Hours Futures Trading (AHFT), from 5:00pm to 11:00pm. Initially, only Hang Seng Index futures and Hang Seng H-shares Index futures will be traded during AHFT session.
- All the trades executed during the after-hours session will be registered as AHFT trades. They will be cleared and settled on the following trading day by the clearing house, together with trades executed during the regular trading sessions of that day. Investors should check with their brokers the arrangements for trading, settlement and the issuance of contract notes and statements of account.
- A 5% price limit up/down mechanism is introduced during the AHFT session. Sell orders with a price below 95% of the last traded price for the spot month contract in the regular trading sessions and buy orders with a price above 105% will not be allowed. The upper and lower price limit will apply to all contract months. Trading will be allowed only within the price limit range during AHFT session. Although there will not be suspension of trading, investors will not be allowed to trade at prices outside the price limit.
For more information about the price limit mechanism, please visit the HKEx website.
- No AHFT will take place if:
– it is a Hong Kong public holiday, there is half-day trading in the HKEx securities market or it is a bank holiday in both the UK and US; and/or
– typhoon signal no. 8 or above or a Black Rainstorm Warning is in effect after 12 noon.
To ensure sufficient trading liquidity during AHFT, HKEx has appointed some liquidity providers to provide quotes at the initial stage of the implementation of AHFT. That means abnormal price deviations can be adjusted by market forces.
Setting the price limit of +/-5% may also be helpful in preventing excessive price movements during AHFT.
For investors trading only during the regular trading session but maintaining open positions overnight, it is possible that brokers may contact you to top up margin taking into account market conditions. Therefore you should ensure that sufficient margins are in place.
An option is a contract that involves two parties, a buyer and a seller. An option’s buyer has the right, but not the obligation, to buy according to a “call” option from, or sell according to a “put” option to the seller the specified underlying asset. Option contracts are for an agreed quantity of an underlying asset, price, and future period. If the buyer (or “holder”) exercises his right, the option’s seller (“writer”) has to settle according to the contract’s specifications. An option holder is described as having a long position, while an option writer has a short position.
- Underlying asset: The assets underlying options can be stocks, market indices, commodities, currencies, debt instruments, and so on. In Hong Kong, exchange-traded options’ underlying assets are mainly stocks and market indices.
- Exercise price / Strike price: This is the predefined price at which the option’s holder trades the underlying asset with the writer.
- Expiry day: The last day on which a holder can exercise an option.
- Exercise style: There are two types of exercise styles. An American-style option can be exercised during any trading day on or before the expiry date. European-style options, on the other hand, can only be exercised on the expiry day.
- Settlement method: This is the predetermined method in which the writer settles an option, and depends on what’s stated in the contract. An option can be settled either by physical delivery of the underlying asset or in cash.
- In-the-money: When the underlying asset’s price is higher than the exercise price of a call option or lower than that of a put option, the options is said to be in-the-money. The holder will likely earn a profit on exercising.
- At-the-money: When the underlying asset’s price is equal to the exercise price, the option is said to be at-the-money. The option would be exercised at a loss because of the premium paid for it, so probably won’t be exercised.
- Out-of-the-money: When the underlying asset’s price is lower than the exercise price of a call option or higher than that of a put option, the option will not be exercised given the holder will lose money on exercising.
When you buy an option, you pay a premium. If you sell an option, you receive the premium, but at the same time you have to deposit an initial margin in your trading account to support your short position.
If the underlying asset’s price falls when you thought it would rise (or vice versa), you will suffer an unrealised loss in your option position. If this takes your margin deposit below the maintenance margin level, your broker will issue a margin call, asking you to deposit cash so the margin rises to its initial level. If you don’t or can’t do this, your broker may close your position without letting you know in advance.
Normally, the exchange on which the option is traded sets initial and maintenance margin levels. However, your broker may set higher margin levels. You must clarify margin levels with your broker before you start trading.
In Hong Kong, exchange-traded options operate under a market-making system so as to provide market liquidity. Responsible exchange participants input quotes to the trading systems on a request and/or continuous basis. But do bear in mind that the quotes may not be at your desired price level.
Longing and shorting options are two different strategies. An option holder, who takes the long position, pays a premium to the option’s writer. If performance of the underlying asset goes against the holder, his maximum loss will be limited to the premium paid.
An option writer, who takes the short position, receives a premium from the holder. In exchange, he takes up the obligation to settle the contract as specified when the holder exercises the option. If the market goes against the option writer, he may suffer a substantial loss exceeding the premium received.
If an option is traded in the Hong Kong exchanges, transaction costs may include brokerage commission, an SFC levy, compensation fund levy, exchange fee or trading tariff, depending on the type of option. You also have to pay a fee to exercise an option.
Warrants are an instrument which gives investors the right – but not the obligation – to buy or sell the underlying asset (e.g. a stock) at a pre-set price on or before a specified date.
Compared with stocks, warrants have more attributes which include:
- Issuer: A warrant can be issued by a listed company (i.e. subscription warrant) or a third party such as a financial institution (i.e. derivative warrant).
- Underlying asset: It can be a single stock, a basket of stocks, an index, a currency, a commodity, a futures contract (e.g. oil futures) etc.
- Types of embedded rights: Don’t mix up a call warrant with a put warrant. A call warrant gives you the right to buy whereas a put warrant gives you the right to sell the underlying asset.
- Exercise price: The price at which you buy or sell the underlying asset in exercising a warrant.
- Conversion ratio: This refers to the number of units of the underlying asset exchanged when exercising a unit of a warrant. Normally, in Hong Kong a derivative warrant on shares has the ratio of 1 (i.e.one warrant for one share) or 10 (i.e.10 warrants for one share).
- Expiry date: The date on which a warrant will expire and become worthless if the warrant is not exercised.
- Exercise style: With an American warrant, you can exercise to buy/sell the underlying asset on or before the expiry date. Whereas a European warrant allows exercise on the expiry date only.
- Settlement: A warrant can be settled by cash or physical delivery upon exercise.
Some warrants have more sophisticated features and are generally referred to as exotic warrants.
Assuming other factors remain constant, if the amount of the declared dividend was in line with what the market expected, there would be no change in the market price of call warrant A on either the dividend announcement date or the ex-dividend date of stock B, because the dividend element had already been priced into call warrant A.
If the liquidity provider used $1.5 as the dividend discount factor to price call warrant A and stock B eventually declared a dividend lower than expected, investors who bought call warrant A at a cheaper price would gain as the price of warrant A would be expected to move up, assuming other factors remain constant. The liquidity provider who sold the warrant at the discounted price might lose.
On the other hand, if stock B declared a larger dividend than expected, the price of warrant A would be expected to drop further, assuming other factors remain unchanged. Accordingly, investors who bought warrant A would lose.
A bond is a debt instrument issued for a predetermined period of time with the purpose of raising capital by borrowing. A bond generally involves a promise to repay the principal and interest on specified dates. This kind of debt instrument may also be called as bills or notes and these names are used interchangeably in the market.
- Issuer: This is the party that borrows the money. Bonds are commonly classified by the nature of their issuer, for example, corporate bonds (issued by companies or their subsidiaries), government bonds (such as Exchange Fund Notes issued by the Hong Kong Monetary Authority), and bonds issued by supranational organizations (like the World Bank).
- Principal: This is also called the par value or face value. It is the amount repaid to the bondholder when the bond matures.
- Coupon rate: This is the rate at which the issuer pays interest on the principal to the bondholder each year. Interest payments are normally made at regular intervals, e.g. annually, semi-annually, quarterly. The coupon rate can be fixed, where it does not change over the term of the bond. It can be floating, where it is reset periodically according to a predetermined benchmark, such as HIBORplus a spread. The coupon rate can even be zero. A zero-coupon bond is usually sold at a price below its principal. The bondholder’s return is then the difference between the purchase price and the principal repaid on maturity.
- Term: This is the life of the bond, i.e. the period (usually a number of years) over which the issuer has promised to meet its obligations under the bond. Some bonds can be “perpetual” in the sense that they do not have a fixed maturity date.
Guarantor: Some bonds are guaranteed by a third party called a guarantor. If the issuer defaults, the guarantor agrees to repay the principal and/or interest to the bondholder.
As their names imply, renminbi bonds are settled in renminbi. This means that their denomination (principal), coupon (interest) and price are denominated in renminbi. Read the offering document of a renminbi bond carefully to understand the background and credit rating of the bond issuer, the terms and conditions of the bond such as its denomination, duration, coupon rate and frequency of interest payment, as well as the risk factors of the bond, etc.
Under the current regulations, only Hong Kong SAR residents with Hong Kong SAR identity cards may open personal renminbi accounts in Hong Kong. Currently, a maximum exchange limit of RMB20,000 per banknote exchange transaction by individuals is imposed. Similarly, the same daily limit of RMB20,000 per person applies to conversion via renminbi accounts. So, when you subscribe for renminbi bonds worth more than RMB20,000, you need to convert your capital into renminbi through several exchanges.
For corporate entities, there are no general legal restrictions on the opening a renminbi account with a renminbi participant bank, exchange renminbi with other currencies and transfers of renminbi between different accounts in Hong Kong. Your bank will need to comply with the usual banking practices and requirements in Hong Kong in handling these transactions for you.
Generally speaking, retail renminbi bonds are offered to the public through distributing banks. The bond issuer will not issue any application form. You will be required to complete and sign on an order form prepared by a distributing bank with which you open a renminbi account for settling your investment in a renminbi bond. You will also need to make a number of acknowledgements and confirmations, for instance, to confirm that you have read and understood the description of the terms of a bond set out in the offering document and agree to be bound by such terms.
Renminbi bonds can be either listed or unlisted. This will be disclosed in the relevant offering document. Listed renminbi bonds are traded on the Stock Exchange of Hong Kong (SEHK) whereas unlisted renminbi bonds are traded over-the-counter. Ask your brokerage or bank if it provides trading services for listed and/or unlisted bonds.
A renminbi product is a generic term which may include a wide range of investment products denominated or settled in renminbi or have exposure to renminbi-linked assets or investments.
In general, a non-Mainland (including Hong Kong) investor who holds a local currency other than renminbi will be exposed to currency risk if he/she invests in a renminbi product. This is because renminbi is a restricted currency and subject to exchange controls, you may have to convert the local currency into renminbi when you invest in a renminbi product. When you redeem / sell your investment, you may also need to convert the renminbi received upon redemption / sale of your investment product into the local currency (even if redemptions / sale proceeds are paid in renminbi). During these processes, you will incur currency conversion costs and you will also be exposed to currency risk. In other words, even if the price of the renminbi product remains the same when you purchase it and when you redeem / sell it, you will still incur a loss when you convert the redemption / sale proceeds into local currency if renminbi has depreciated.
Like any currency, the exchange rate of renminbi may rise or fall. Further, renminbi is subject to conversion restrictions and foreign exchange control mechanism.
Investment / market risk: Like any investments, renminbi products are subject to investment risk and may not be principal protected i.e. the assets that the products invest in or referenced to may fall as well as rise, resulting in gains or losses to the product. This means that you may suffer a loss even if renminbi appreciates.
Liquidity risk: Renminbi products are also subject to liquidity risk as renminbi products are a new type of product and there may not be regular trading or an active secondary market. Therefore you may not be able to sell your investment in the product on a timely basis, or you may have to sell the product at a deep discount to its value.
Issuer / counterparty risk: Renminbi products are subject to the credit and insolvency risks of their issuers. You should consider carefully the creditworthiness of the issuers before investing. Furthermore, as a renminbi product may invest in derivative instruments, counterparty risk may also arise as the default by the derivative issuers may adversely affect the performance of the renminbi products and result in substantial losses.
Currency risk: As explained in Question 2 above, an investor is also subject to the risk of renminbi depreciation if he/she intends to convert any renminbi-denominated redemption / sale proceeds into another currency.
Depending on the nature of the renminbi product and its investment objective, there may be other risk factors specific to the product which you should consider. Before making an investment decision, always read the risk factors as set out in the offering documents and seek professional advice where necessary.
An authorized index tracking exchange traded fund (ETF) is a fund authorized by the Securities and Futures Commission (SFC) that is traded on an exchange. Its principalobjective is to track, replicate or correspond to the performance of an underlying index. The index can be on a stock market, a specific segment of a stock market or a group of stock markets in a region or elsewhere in the world. It can also be on bonds or commodities.
An ETF gives investors an indirect access to a certain market. By investing in an ETF, investors can receive a return that replicates (although not 100% in most cases) the performance of the index without actually owning the constituents that comprise the index. In some cases, an ETF tracks an index of a market that has restricted access (such as, the China A-share market and the Indian market), thus giving investors indirect access to a market that is not accessible by foreign investors not domiciled in that jurisdiction.
Exchange trading – An ETF is structured as a mutual fund or a unit trust but its units, like a stock, are also tradable on the Stock Exchange of Hong Kong (SEHK).
Index tracking – To achieve the index tracking objective, a fund manager may adopt one or more of the following strategies:
- full replication by investing in a portfolio of securities that replicates the composition of the underlying index;
- representative sampling by investing in a portfolio of securities featuring a high correlation with the underlying index, but is not exactly the same as those in the index; or
- synthetic replication through the use of financial derivative instruments to replicate the index performance.
Synthetic replication is sometimes used by an ETF to raise efficiency and reduce cost. Where an ETF tracks a market (or an index in a market) that has restricted access, it has no other choice but to adopt synthetic replication through the use of financial derivative instruments.
Trading price vs. Net Asset Value (NAV) – Each ETF has an NAV that is calculated with reference to the market value of the investments held by it. However, the trading price of an ETF on the SEHK, like that of a stock, is also determined by the supply and demand of the market. The trading price of an ETF may not therefore be equal to its NAV, and this disparity may give rise to arbitraging opportunities.
Dividend entitlement – An ETF may or may not distribute dividends, depending on its dividend policy.
Fees and charges – An ETF incurs certain fees and expenses such as management fees charged by the ETF manager and other administrative costs. These fees and expenses will be deducted from the ETF’s assets and the NAV will be reduced accordingly. Like stocks, trading ETFs on the SEHK incurs transaction costs such as stamp duty, transaction levy and brokerage commission.
Regulated fund – Like other authorized funds, an ETF has to comply with the relevant regulatory requirements imposed by the SFC. However, you should note that SFC authorization does not imply recommendation of the product.