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How Does The HK Market Work

Views 31772022.11.09

Introduction to Hong Kong Stock Market

For beginners, before you start investing in the Hong Kong stock market, you may need a basic knowledge of it.

In view of that, we provide a series of courses explaining how the Hong Kong stock market works on moomoo for beginners, covering the following six chapters:

1. Basic Introduction

2. Market Rules (trading hours, trading mechanism, trading rules, etc.)

3. Products (stocks, ETFs, HK IPOs, options and futures, warrants, etc.)

4. Milestones of Listed Companies (offerings, rights issues, dividends, suspensions, delistings, etc.)

5. Practical Skills (information acquisition, information studying, skills improvements, etc.)

6. How to Identify "Cheating" Stocks (characteristics and guidelines on how to avoid cheating stocks)

In the first chapter, we will introduce some basic concepts about the Hong Kong stock market, including:

1. Definition and History of Hong Kong Stocks

2. Market Structure

3. Investor Structure 

4. Listed Company Structure

5. Major Stock Indexes

6. Definition and History of Hong Kong Stocks

1. Definition and History of Hong Kong Stocks

Stocks listed on the Hong Kong Exchanges and Clearing Limited(HKEx) are called Hong Kong stocks. And the history of Hong Kong stocks could date back to the 19th century.

As early as 1866, there was stock trading in Hong Kong, but stocks were traded on a very small scale at that time. The first formal market, the Stockbrokers' Association of Hong Kong, was not established until 1891. Later, the Association was re-named the Hong Kong Stock Exchange in 1914.

The rapid growth of the Hong Kong economy led to the establishment of three other exchanges - the Far East Exchange in 1969, the Kam Ngan Stock Exchange in 1971, and the Kowloon Stock Exchange in 1972.

In 1986, the above four exchanges were merged into one, which is known as the Stock Exchange of Hong Kong Limited (SEHK), sending the Hong Kong economy on a faster track. By 2000, SEHK, Hong Kong Futures Exchange Limited (HKFE), and Hong Kong Securities Clearing Company Limited (HKSCC) were merged to form the Hong Kong Exchanges and Clearing Limited (HKEX), which became one of the first stock exchanges in the world to go public.

As one of the world's well-known financial centers, Hong Kong attracts plenty of high-quality companies to go public and attracts plenty of international investors. In the past decade, Hong Kong's IPO financing scale has always ranked among the top three in the world and has ranked first many times. It is one of the most attractive markets across the world.

2. Market Structure

Hong Kong stocks are classified into two categories: stocks listed on the Main Board and the Growth Enterprise Market (GEM). Compared with the Main Board, the GEM listing conditions are looser, with a lower aggregate market capitalization threshold, lower requirements for cash flow, and no requirement for profits. At present, the Main Board dominates the HKEX, as companies listed on the Main Board tend to be more mature in terms of business operation and financial standing.

There is a total of 2,566 stocks listed on the HKEX, including 2,216 on the Main Board and 350 on the GEM. (Data as of May 12, 2022, HKEX)

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(Source: Wind Information; chart plotted by Moomoo learn)

As of May 12, 2022, the average market capitalization of the Main Board was about HK$22.11 billion, the average revenue was about HK$25.55 billion, and the average net profit was about HK$2.33 billion. 

While the average market capitalization of the GEM was about HK$250 million, the average revenue was about HK$260 million, and the average net loss was HK$10 million.

Due to the smaller overall market capitalization and fewer profits of the GEM, the investors, especially novice investors, should be more cautious before investing in the GEM. By contrast, the Main Board stocks may serve as better options.

The easiest way to recognize whether companies are listed on the Main Board or the GEM is to refer to the ticker symbol. HKEX-listed companies have a 5-digit ticker symbol starting with "0", and GEM stocks' ticker symbols start with "08".

3. Investor Structure

Investors can be divided into individual and institutional investors. Generally, institutional investors are the main participants of a mature market, but with the development of online brokerage, the proportion of individual investors is on the rise.

According to a survey on the HKEX website, in 2020, the total turnover was HK$32.1 trillion, of which local (Hong Kong) and overseas individual investors contributed 15.5%, local (Hong Kong) and overseas institutional investors contributed 56.5%, and the Exchange Participants contributed 28.1%. In other words, in terms of turnover by investor type, institutional investors are the majority. Although the HKEX only released the data as of 2020, the market structure generally will not change significantly in the short term.

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Source: HKEX Cash Market Transaction Survey 2020

As to the proportion of investors from countries or regions other than Hong Kong, institutional and individual investors outside Hong Kong accounted for 41.2%, of which the US and European investors contributed over 45% of the trading value, and the Asian investors outside Hong Kong also contributed over 45% of the segment. 

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Source: HKEX Cash Market Transaction Survey 2020

4. Listed Company Structure 

As an international financial hub, the Hong Kong stock market not only serves the local (Hong Kong) companies but also attracts companies from over 20 countries.

According to data from Wind and moomoo Learn, if we classify the companies by place of major business operation, more than 500 listed companies are mainly operating in Hong Kong, accounting for only about 20% of the total. While there are more than 1,200 listed companies mainly operating in mainland China, accounting for about half of the total number. The remaining 30% of the listed companies are mainly operating in Europe, the United States, Malaysia, and other countries and regions.

In terms of the types of listed companies, HKEX-listed companies can be classified into blue chips, red chips, and H shares.

Blue chips refer to well-established and financially sound companies. 

E.g., Technology stocks: TENCENT (00700), Alibaba (09988); 

Financial stocks: HSBC Holdings PLC (00005) and AIA (01299); 

Real estate stocks: China Resources Land (01109) and New World Development (00017).

Red chips are incorporated outside mainland China and listed on the HKEX. A red-chip company conducts much of its business in mainland China, and with (majority) shares controlled either directly or indirectly by mainland China state entities.

Eg. XIAOMI (01810), China Mobile (00941), Angelalign (06699).

H shares are the shares of the Chinese companies registered in mainland and listed in Hong Kong. Tsingtao Brewery Company Limited is the first H share listed in Hong Kong. Other examples of H shares include Banking shares such as BANK OF CHINA (03988) and ICBC (01398).

5. Major Stock Indexes

There are three major stock indexes in the Hong Kong stock market: Hang Seng Index (HSI), Hang Seng China Enterprises Index (HSCEI), and Hang Seng Technology Index (HSTI).

Hang Seng Index (HSI) is the most representative index in the Hong Kong stock market and also the most concerned index for investors. Founded by Hang Seng Bank in 1969, its base was set at 100 points, equal to the total value of the Hang Seng Index's constituent stocks, when the market closed on July 31, 1964. By May 12, 2022, the closing price of the index is 19,380 points, rose nearly 200 times in 58 years, with a compound annual increase of more than 10%.

Today, HSI consists of 66 companies, including AIA, Tencent, HSBC, Alibaba, Meituan, etc., with a total market capitalization of HK$26 trillion as of May 12, 2022, accounting for over half of the total market capitalization.

The Hang Seng China Enterprises Index (HSCEI) aims to reflect the overall performance of Mainland Chinese enterprises listed in Hong Kong. The HSCEI was launched in 1994, but its base date was then changed to Jan 3, 2000, and the base value was set as 2000 points. By May 12, 2022, the closing price of the index is 6,595 points, rose 2.3 times in 21 years, with a compound annual increase of about 5.8%.

HSCEI is made up of 50 constituent stocks, including Meituan, Alibaba, Tencent, CCB, ICBC, Ping An, etc., with a total market capitalization of about HK$16.6 trillion as of May 12, 2022.

The Hang Seng Technology Index (HSTI) was launched in 2020. Since HKEX carried out major IPO institutional reforms in 2018, such as WVR (Weighted Voting Rights), a large number of technology stocks have been listed on HKEX. Thus Hang Seng Bank Limited launched HSTI. At present, its constituent stocks mainly include the 30 largest technology enterprises such as Meituan, Alibaba, JD.com, Tencent, Xiaomi, and Kuaishou.

These are the basic introduction to the Hong Kong stock market. Hope this helps. However, this is not the whole story. There's more to learn about the market rules, which will be explained in the next chapter. 

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