HK Stocks

 

Capitalizing on the rapid development of Chinese economy, Hong Kong has become an important international financial centre and is widely regarded as one of the fastest growing export-oriented economy in the Asia-Pacific region. In recent years, Hong Kong has successfully attracted enterprises from all over the world to list their companies here, especially Chinese enterprises. The market weighting of state-owned and privately-owned enterprises has increased gradually in the equity market, which suggests a growing impact of mainland Chinese economy on the development of Hong Kong stock market.


Introduction


The benchmark Hang Seng Index is composed of 51 constituent stocks, representing about 61% of total market value coverage in Hong Kong. The constituents stocks are grouped under different sectors such as Finance, Telecommunications, Properties, Utilities and so forth, contributing more than 46% of daily aggregate market turnover. Apart from stocks of listed enterprises, there are also different kinds of securities available for trading such as warrants, Callable Bull/Bear Contracts (CBBC), Exchange-traded Funds (ETFs) and Real Estate Investment Trusts (REITs).

 

Hong Kong Stock Trading Hours

Time Period
09:00am-09:30am Pre Market Opening Period
09:30am-12:00pm Morning Trading Session
12:00pm-01:00pm Lunch Closing
01:00pm-04:00pm Afternoon Trading Session
04:00pm-04:10pm Closing Auction Trading Session 

All stock trades in Hong Kong are settled on the second trading day after transaction date (T+2). Comparing with the stock markets in different neighbouring regions, Hong Kong has less trade restrictions as investors can immediately sell the stocks purchased earlier on the same trading day, and the stock market is free from interventions such as suspension and limitation on price fluctuations.

 

Warrants / Covered Warrants


 

Apart from listed company stocks, trading of certain derivative products such as warrants, covered warrants and CBBCs is also hugely popular.

1. What is a Warrant?

Warrant is a right but not an obligation to buy or sell a certain underlying assets (stock, index, currency or commodity) at a pre-determined price (strike price) on or before a pre-determined date (Expiry Date).

2. Two types of Warrants
(I) Company Warrants 

Companies issue call warrants over its own stock to raise capital for themselves. When the warrants are exercised, the company will issue new shares for settlement. Some company warrants are American warrants, which allow investors to exercise the warrants on or before the expiry date.

(II) Covered Warrant
They are issued by financial institutions. Issuers do not issue warrants to raise capital for themselves but provide investors with another form of investment instrument. Derivative warrants (covered warrants) are exchange listed securities. Most of the covered warrants are European warrants (i.e. investor can only exercise the warrants on expiry date and buy/sell the warrants on the secondary market). On the expiry date, if the warrant has intrinsic value, investor can exercise the warrant and it will be cash settled.
There are two types of covered warrant:
Covered call warrant: On the expiry date of the call warrant, holders can buy the asset from the issuer based on the conversion ratio at the strike price. It fits the needs of investors who are optimistic about the movement in asset price.
Covered put warrant: On the expiry date of the put warrant, holders can sell the asset to the issuer based on the conversion ratio at the strike price. It fits the needs of investors who are pessimistic about the movement in asset price.

 

3. About Cash Settlement

All warrants in Hong Kong are European cash settled (i.e. exercised on maturity date and settled in the form of cash). Settlement price of stock warrants is determined using the 5-day average closing price of the underlying stock. If the warrant expires in the money at maturity, the cash settlement amount will be automatically transferred to the client account while transaction costs such as handling fees would apply.


 

4. What is a CBBC ?

Callable Bull/Bear Contracts (CBBC) is a derivative product with terms similar to warrants such as strike price, expiry date and conversion ratios.

There are 2 types of CBBCs: Bull contract and Bear contract. The bull contract represents optimistic and the Bear contract represents pessimistic on a particular underlying. Investor can enjoy the gearing effect of changes in underlying price through a small amount of investment.

5. What is Call Price ?
If the underlying asset price reaches the call price at any time prior to expiry, the Mandatory Call Feature will be triggered whereby the respective CBBC will expire and be settled early, and its trading will not resume even if the underlying asset price goes up/down. It should be noted that, as issuers will buy/sell index futures for hedging purpose, the price of index CBBC will be affected by the index futures; however, it is the underlying index which determine whether the CBBC will be called. When the underlying asset is trading close to the Call Price, the price of a CBBC may be more volatile, or even disproportionate with the change in the price of the underlying asset.
6. What is Strike Price ?
Strike price is the key determining factor of CBBC pricing. Assume the conversion ratio and underlying asset are the same, the higher the strike price, the lower (higher) the theoretical price of a Bull (Bear) contract and vice versa.

However, investors should also pay attention to the call price, as the CBBC will be called and its trading will be terminated once the index/stock price reaches the call price, regardless of the strike price and the expiry date.