Understanding Risks of Securities Traded on the Exchange 
07/04/2009 
 

This education document does not describe all of the risks and other aspects of trading in the securities market. Trading in securities may not be suitable for all members of the public. Investors should carefully consider whether securities trading is appropriate for them in light of their understanding of the product nature and characteristics, their own investment objectives, skills and experience, financial resources, risk tolerance and other relevant circumstances. If investors require further information for investing in securities, they should refer to the prospectuses and other documents issued by the issuers on the HKExnews website (http://www.hkexnews.hk) and consult their brokers or other professional advisors prior to making any decision.

Securities are traded at the Exchange either on the Main Board or the Growth Enterprise Market (GEM).  On the Main Board, the key product types include equities, equity warrants, debts, structured products, Exchange Traded Funds and other unit trusts/mutual funds.  On the GEM, product types mainly consist of equities and equity warrants.

Main Board Securities
 
1.

Product knowledge and risk tolerance
 
Before trading in any security, investors should carefully read the most up-to-date prospectuses/listing documents, financial statements, announcements and other information published either on the issuers’ websites, HKEx corporate (http://www.hkex.com.hk) and HKExnews websites (http://www.hkexnews.hk) to learn about the product features and risk factors involved.  Investors should not trade any security unless it suits their investment objectives, financial resources and risk tolerance.
 

2. 

Price and liquidity risks
 
The price of any security may go up or down so there is an inherent risk that losses may be incurred as a result of buying and selling securities.  Security prices may also fluctuate due to various market factors, and investors’ exposure to risk may vary according to the type of orders they input (eg short selling orders, market orders, at auction orders), the way the transaction is financed (eg margin financing) and the nature of the security product concerned (eg whether it is leveraged or issued with a fixed expiry date).  Liquidity of securities may also fluctuate, resulting in situations where an investor may not be able to buy or sell the security in a timely manner at their preferred price range if the turnover volume were to drop significantly.
 

3.

Counterparty risk
 
Some securities such as structured products and Exchange Traded Funds may carry exposure to counterparty risk of financial intermediaries involved in structuring or managing the products concerned or providing liquidity to support trading of the securities.  The following table summarises some common types of financial intermediaries involved in structured products and Exchange Traded Funds: 
 

 Product types

Types of financial intermediaries

Issuer/ manager

SMMs

PDs

LPs

1

Structured products

(eg derivative warrants and callable bull/bear contracts)

*

-

-

*

2 Exchange Traded Funds (ETFs)

 

 

 

 

(a)   Full replication and representative sampling strategies

*

*

*

-

(b)   Synthetic replication strategies

*

*

*

-

Note:
1.    Liquidity Providers (LPs) are appointed by structured product issuers to provide liquidity for their product issues
2.    Securities Market Makers (SMMs) are Exchange Participants that provide liquidity for ETFs
3.    Participating Dealers (PDs) are appointed by ETF managers to carry out creation and redemption of ETFs
 
 
Additional education materials focusing on some specific product structures and risks are available at the links below:

   
GEM Securities
 
4.

Characteristics of GEM 
 
The GEM is a second board and stepping stone towards the Main Board.  It is positioned as a market designed to accommodate companies to which a higher investment risk may be attached than other companies listed on the Exchange.  It is a market designed for professional and sophisticated investors.

Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of the GEM mean that it is a market more suited to professional and other sophisticated investors. Given the nature of companies listed on the GEM, there is a risk that securities traded on the GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on the GEM. Before trading in any security, investors should carefully read the characteristics and disclaimer statements under Chapter 2 of the GEM listing rules on the GEM website (http://www.hkgem.com).