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HK Stock Market Introduction

Capturing the rapid development of Chinese economy in the recent years, Hong Kong has become an important international financial centre and its stock market is widely regarded as one of the most efficient stock market in the Asia-Pacific region. In recent years, a number of enterprises from different regions had chosen to list in Hong Kong stock market, especially Chinese enterprises. The market weighting of China state-owned and privately-owned Chinese enterprises has increased substantially in the equity market over the years, which suggests a growing impact of mainland Chinese economy on the development of Hong Kong stock market.

The major benchmark index in Hong Kong stock market is Hang Seng Index, which is composed of 50 constituent stocks and 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 as much as 50% of daily aggregate market turnover. Apart from shares of listed enterprises, there are also different kinds of securities & derivatives 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
Auction Session
Pre-opening Session 09:00am-09:30am
Continuous Trading Session
Morning Session 09:30am-12:00pm
Lunch Closing 12:00pm-01:00pm
Afternoon Session 01:00pm-04:00pm
All stock trades in Hong Kong are settled two trading days after transaction date (T+2). Comparing with the stock markets in its 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 price fluctuation limitation.
Equity Securities
HK equity securities are mainly divided into two groups, which are Main Board and GEM (Growth Enterprises Market) respectively. Main Board stocks are enterprises that are with stronger financial background and larger capital size, while GEM stocks are companies that are usually set up for a few years and with a weaker financial background and smaller capital size. Generally speaking, investing in Main Board stocks are less risky than GEM stocks.
Warrants / Covered Warrants
Apart from listed company stocks, trading of certain derivative products such as warrants, covered warrants and CBBCs is becoming more and more popular in recent year due to its high volatility.
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.
(II) Covered Warrants
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. Covered warrants in Hong Kong can be call or put and are cash settled.
3. Cash Settlement
All derivative warrants issued by financial institutions 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 credited to the client account after debiting any handling fees.
CBBC - Callable Bull/Bear Contracts
Callable Bull/Bear Contracts (CBBC) is a derivative product with terms similar to warrants such as strike price, expiry date and conversion ratios. The major difference of CBBC and warrants is that CBBC has a call price and a Mandatory Call Feature. 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.
Mandatory Call Feature
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 early, and its trading will be terminated immediately. Whether the called CBBC has a residual value depends on what category the contract belongs to. CBBC is mainly divided into Category N and Category R. When Category N CBBC is called before expiry, there will not be any residual value. When Category R is called before expiry, there is possible residual value upon the occurrence of a Mandatory Call but in the worst case, no residual value will be paid. The CBBCs in Hong Kong are mostly Category R.
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.

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