A must-see for newbies: An initial understanding of the Hong Kong stock market

He knows how to use war, and his confidants know that he will win every battle. Before entering the Hong Kong stock market to begin your investment journey, you may need to have a preliminary but thorough understanding of this market.

In order for everyone to better understand the Hong Kong stock market, Futubull Classroom has conducted a series of introductory courses to thoroughly sort out the basic situation of the Hong Kong stock market. It will include six sections:

1. Introduction to the Hong Kong Stock Market

2. Hong Kong stock market rules (trading hours, trading mode, trading rules, etc.)

3. Major varieties of the Hong Kong stock market (stocks, ETFs, Hong Kong stock updates, options futures, Wolun Bull and Bear, etc.)

4. Important events of Hong Kong stock listed companies (placements, share offers, dividends, suspension of trading and delisting, etc.)

5. Practical tips for Hong Kong stocks (obtaining information, studying information, improving skills, etc.)

6. How to avoid old thousand stocks (characteristics of old thousand stocks and lightning protection guide)

Well, in the first section, we will introduce you to some preliminary developments in the Hong Kong stock market, including the concept and history of Hong Kong stocks, the market structure of Hong Kong stocks, the structure of investors, the structure of listed companies, and the main market indices of Hong Kong stocks.

I. The concept and history of Hong Kong stocks

The definition of Hong Kong stocks is simple. Stocks listed on the Hong Kong Stock Exchange are called Hong Kong stocks. However, the history of Hong Kong stocks is not simple; it dates back to the 19th century.

As early as 1866, stock trading began in Hong Kong, but at the time, all transactions were scattered. By 1891, the Hong Kong Stock Brokers Association was established, marking the official birth of the Hong Kong stock market. Since then, the Hong Kong Stock Brokers Association changed its name to the Hong Kong Stock Exchange. By 1969, the Hong Kong stock market ushered in a big bull market. A large number of participants and capital entered the market. One exchange was far from meeting demand. Three stock exchanges, Far East, Gold and Silver, and Kowloon, were established one after another, and Hong Kong stocks entered the “era of four meetings” in one city.

In 1986, the four exchanges merged into the Hong Kong Stock Exchange, referred to as the “Stock Exchange” for short, and became the only stock exchange in Hong Kong. Since then, the Hong Kong stock market has developed rapidly. By 2000, the Stock Exchange, Futures Exchange, and Hong Kong Clearing House merged and listed in Hong Kong, becoming one of the first exchange groups in the world to be listed.

Today, the Hong Kong market has become one of the world's famous financial centers, attracting a large number of high-quality companies to go public, and a large number of international investors to invest in Hong Kong stocks. Over the past ten years, Hong Kong's IPO financing scale has always ranked in the top three in the world, and has ranked first many times, making it one of the most attractive markets in the world.

II. Market structure of Hong Kong stocks

Looking at the market structure, Hong Kong stocks can be mainly divided into the main board and the GEM. Compared to the main board, the GEM listing conditions are relatively relaxed, the total market capitalization threshold is lower, the cash flow requirements are also lower, and there are no profit requirements. Currently, Hong Kong stocks are mainly on the main board, and companies listed on the main board are also relatively more mature in terms of business and finance.

As of May 12, 2022, according to data from the Hong Kong Stock Exchange's official website, there are a total of 2,566 stocks listed on the Hong Kong Stock Exchange, including 2,216 on the Main Board and 350 on the GEM.

Among them, as of May 12, 2022, the average market value of Main Board stocks was approximately HK$22.11 billion, average revenue was approximately HK$25.55 billion, and average net profit was approximately HK$2.33 billion. Meanwhile, the average market value of GEM stocks was about 250 million, the average revenue was about HK$260 million, and the average net loss was HK$100 million.

Investors, especially some novice investors, should be cautious before investing due to the small overall market value of GEM and poor profitability. Mainboard stocks are a relatively more robust option.

The easiest way to identify companies listed on the main board and GEM is to look at the stock code. Hong Kong stock listed companies have a 5-digit code starting with 0. Among them, all GEM stock codes start with “08.”

III. Investor structure of Hong Kong stocks

Investors in a market can generally be divided into institutional investors and individual investors. Relatively mature markets are generally dominated by institutional investors, and with the development of internet transactions, the activity of individual investors participating in transactions tends to increase.

As far as the Hong Kong stock market is concerned, according to the Hong Kong Stock Exchange's official website, in 2020, the total turnover of the Hong Kong Stock Exchange Main Board and GEM was HK$32.1 trillion, of which individual investors from Hong Kong and abroad accounted for 15.5% of the total transaction amount, local and foreign institutional investors accounted for 56.5%, and trader participants themselves accounted for 28.1% of transactions. In other words, in the composition of transaction amounts, institutional investors occupy a dominant position. Although the Hong Kong Stock Exchange has only disclosed data up to 2020, the market structure will generally not change significantly in the short term.

On the other hand, judging from the regional composition of foreign investors, foreign institutions and individual investors together accounted for 41.2%. Among them, US and European investors accounted for more than 45% of the transaction amount, and Asian investors outside Hong Kong also accounted for more than 45%.

Data source: Hong Kong Stock Exchange's “Spot Market Trading Research Survey 2020”

IV. Structure of listed companies in Hong Kong stocks

As an international financial center, the Hong Kong stock market not only serves the local market in Hong Kong, but also attracts companies from more than 20 countries around the world to go public in Hong Kong.

Looking at the geographical structure of Hong Kong listed companies, according to Wande data and Futu Classroom, the main business is about 500 local stocks in Hong Kong, China, accounting for only about 20% of the total number of listed companies. There are more than 1,200 stocks in mainland China, accounting for about half of the total number of listed companies. About 30% of the other listed companies are distributed in Europe, the United States, Malaysia and other countries and regions, all over the world.

Looking at the types of listed companies, Hong Kong stock listed companies can also be divided into blue chips, red chips, H shares, etc.

Among them, blue-chip stocks refer to mature enterprises with relatively stable operations. Representative stocks include large technology stocks such as Tencent and Alibaba; financial stocks such as HSBC Holdings and AIA; and real estate stocks such as China Resources Land and New World Development.

Red chip stocks are companies registered overseas, but their main business is in mainland China and is controlled by mainland capital. For example, Xiaomi Group, China Mobile, and Time Angel are all red chip stocks.

H shares refer to Chinese companies registered in mainland China and listed in Hong Kong. Tsingtao Brewery is the first H share in the Hong Kong stock market. It includes bank stocks listed in Hong Kong such as Bank of China and Industrial and Commercial Bank. Most of them are also H shares.

5. Major stock indices for Hong Kong stocks

There are three main stock indices that are receiving a lot of attention in the Hong Kong stock market: Hang Seng Index, Hang Seng China Enterprise Index, and Hang Seng Technology Index.

The Hang Seng Index is the most representative index in the Hong Kong stock market, and it is also the index that investors are most concerned about. It was founded by Hang Seng Bank in 1969. With July 31, 1964 as the base period, the base period index was set at 100 points. As of May 12, 2022, the index closed at 19,380 points, rising nearly 200 times in 58 years, with a compound annual increase of more than 10%.

Today, the constituent stocks of the Hang Seng Index include 66 companies including AIA, Tencent, HSBC, Ali, and Meituan. As of May 12, 2022, the total market value reached HK$26 trillion, accounting for more than half of the total market value of Hong Kong stocks.

The Hang Seng China Enterprises Index, also known as the State-owned Enterprises Index, aims to reflect the overall performance of mainland Chinese companies listed in Hong Kong. The benchmark date was later changed to January 3, 2000, and the base period index was set at 2,000 points. As of May 12, 2022, the closing price of the index was 6595 points. It rose 2.3 times over 28 years, with a compound annual increase of about 5.8%.

The Hang Seng China Enterprise Index mainly includes 50 companies including Meituan, Ali, Tencent, CCB, ICBC, and Ping An of China. The total market value as of May 12, 2022 was approximately HK$16.6 trillion.

The Hang Seng Technology Index is an index that was only launched in 2020. Since the Hong Kong Stock Exchange carried out major new stock issuance system reforms in 2018, such as different shares, the Hong Kong Stock Exchange has welcomed the listing of a large number of technology stocks. Hang Seng has also followed the trend and launched the Hang Seng Technology Index, which has received high attention. Currently, its constituent stocks mainly include the 30 largest listed technology companies, including Meituan, Ali, JD, Tencent, Xiaomi, and Kuaishou.

OK, the above is a preliminary overview of the Hong Kong market. I believe after reading this section, you will have an initial understanding of the Hong Kong market. However, before officially participating in the Hong Kong stock market, you also need to understand the relevant market rules, which we will introduce in the next issue.