What it means
An exchange is a marketplace where shares, bonds and derivatives are bought and sold under set rules. HKEX operates the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange, and it runs the clearing houses that guarantee and settle trades so that buyers receive their shares and sellers receive their money.
It also owns the London Metal Exchange, a major market for industrial metals. Companies list in Hong Kong to raise money from investors around the world.
The main market suits established businesses, and a second market was created for smaller and growth companies. Rules cover disclosure, governance and the minimum profit or size that a company must have, and HKEX acts as a front-line regulator under the supervision of the city's securities regulator.
A key feature is the Stock Connect programme, which links Hong Kong with the exchanges in Shanghai and Shenzhen. Through it, international investors can buy approved mainland shares, and mainland investors can buy approved Hong Kong shares, using local brokers and their own currencies.
This has made HKEX a gateway between China and global capital markets. Hong Kong's currency is linked to the US dollar within a narrow band, which makes it easier for global investors to hold assets there.
Many mainland companies list in Hong Kong in addition to or instead of mainland markets, and some global businesses with Asian operations also list there. For a finance team, a listing can broaden the investor base, but it adds reporting duties and exposes the company to different investor expectations.
Like any exchange, HKEX earns money from trading and clearing fees, listing fees, market data and investment income on the margin deposits it holds. Its profits therefore rise and fall with trading volumes and the number of new listings.
That makes its results a useful gauge of market sentiment in Asia. Investors should also remember that trading hours, tick sizes and settlement cycles are set by the exchange and can differ from home markets.
Foreign investors need a broker with access to the market and should check the currency, the tax treatment of dividends and the rules on short selling. Getting these details wrong can turn a sound investment idea into an expensive surprise.
In practice
Real-world examples.
Example
A mainland technology company lists in Hong Kong to raise capital from international investors. Its finance team prepares disclosure documents and works with banks to attract anchor investors before the offering.
Example
A global fund manager uses Stock Connect to buy shares in a mainland manufacturer through a Hong Kong broker. She pays in a familiar currency arrangement, and the trade is settled through the clearing system.
Example
An equity analyst studies HKEX's own results to judge market activity. When trading volumes and new listings climb, she raises her forecast for the exchange's earnings.
Formula
Calculation
Turnover ratio = value of shares traded in a period / average market capitalisation x 100
Suppose a listed company has an average market capitalisation (share price multiplied by shares in issue) of $800,000,000, and shares worth $600,000,000 traded in the year.
Turnover ratio = 600,000,000 / 800,000,000 x 100 = 75%.
The figure shows that, in value terms, three quarters of the company's market value changed hands during the year. If a competitor with the same market capitalisation saw only $160,000,000 traded, its turnover ratio would be 160,000,000 / 800,000,000 x 100 = 20%, suggesting its shares are much harder to buy and sell.Case study
Seen in the real world.
Jadehaven Foods is a fictional company with operations in several Asian countries that considered a secondary listing in Hong Kong. Its finance director estimated that the listing would raise $250,000,000 and widen its investor base, but would cost $6,000,000 in fees and add reporting requirements.
In this illustrative decision, the board weighed the benefits of cheaper capital and a higher profile against the costs and the risk of volatile trading. It proceeded, because the lower cost of capital was worth more than the one-off fees, and it hired an investor relations lead to manage communication with the new shareholders. The listing went ahead the following year, and the first annual report under the new rules took the finance team an extra three weeks.
Watch out
Common mistakes.
- Treating HKEX as only a stock market, when it also runs derivatives, clearing and the London Metal Exchange.
- Assuming that a Hong Kong listing automatically gives access to all mainland investors, when access depends on eligibility rules and connect programmes.
- Ignoring listing costs and continuing obligations, which are significant for smaller companies.
Questions
People also ask.
What does HKEX stand for?
It stands for Hong Kong Exchanges and Clearing Limited.
What is Stock Connect?
It is a programme linking Hong Kong with the Shanghai and Shenzhen exchanges so investors can trade eligible shares across the border.
Is HKEX a listed company?
Yes, HKEX shares are traded on its own exchange.
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