Risk of Securities Trading

The prices of securities fluctuate, sometimes dramatically.  The price of a security may move up or down, and may become valueless.   It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities.

Risk of Trading Growth Enterprise Markets Stocks

Growth Enterprise Market (GEM) stocks involve a high investment risk. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability.  GEM stocks may be very volatile and illiquid. You should make the decision to invest only after due and careful consideration.  The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.  Current information on GEM stocks may only be found on the internet website operated by The Stock Exchange of Hong Kong Limited. GEM Companies are usually not required to issue paid announcements in gazetted newspapers. You should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of GEM stocks.

Risk of Trading Nasdaq-Amex Securities at the Stock Exchange of Hong Kong

The securities under the Nasdaq-Amex Pilot Program (PP) are aimed at sophisticated investors.  You should consult your dealer and become familiarised with the PP before trading in the PP securities.  You should be aware that the PP securities are not regulated as a primary or secondary listing on the Main Board or the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.

Risk of Providing an Authority to Lend or Deposit Your Securities with Third Parties

There is risk if you provide your dealer or securities margin financier with an authority that allows it to lend your securities to or deposit them with certain third parties under the Securities and Futures Ordinance (Cap. 571) and related Rules.  This is allowed only if you consent in writing. The consent must specify the period for which it is current, which cannot exceed 12 months.  You are not required by any law to sign these authorities.  But an authority may be required by dealers or securities margin financiers, for example, to facilitate margin lending to the client or to allow the client’s securities to be loaned to or deposited as collateral with third parties.  Your dealer or securities margin financier should explain to you the purposes for which one of these authorities is to be used.  If you sign one of these authorities and your securities are lent to or deposited with third parties, those third parties will have a lien or charge on your securities.  Although your dealer or securities margin financier is responsible to you for your securities lent or deposited under the authority, a default by it could result in the loss of your securities.   A cash account not involving securities borrowing and lending is available from most dealers.  If you do not require margin facilities or do not wish your securities to be lent or pledged, do not sign the above authorities and ask to open this type of cash account.

Risk of Margin Trading  

The risk of loss in financing a transaction by deposit of collateral is significant. You may sustain losses in excess of your cash and any other assets deposited as collateral with the dealer or securities margin financier. Market conditions may make it impossible to execute contingent orders, such as "stop-loss" or "stop-limit" orders. You may be called upon at short notice to make additional margin deposits or interest payments.  If the required margin deposits or interest payments are not made within the prescribed time, your collateral may be liquidated without your consent.  Moreover, you will remain liable for any resulting deficit in your account and interest charged on your account.  You should therefore carefully consider whether such a financing arrangement is suitable in light of your own financial position and investment objectives.

Risk of Providing an Authority to Repledge Your Securities Collateral etc.  

There is risk if you provide the licensed or registered person with an authority that allows it to apply your securities or securities collateral pursuant to a securities borrowing and lending agreement, repledge your securities collateral for financial accommodation or deposit your securities collateral as collateral for the discharge and satisfaction of its settlement obligations and liabilities.  If your securities or securities collateral are received or held by the licensed or registered person in Hong Kong, the above arrangement is allowed only if you consent in writing. Moreover, unless you are a professional investor, your authority must specify the period for which it is current and be limited to not more than 12 months. If you are a professional investor, these restrictions do not apply.   Additionally, your authority may be deemed to be renewed (i.e. without your written consent) if the licensed or registered person issues you a reminder at least 14 days prior to the expiry of the authority, and you do not object to such deemed renewal before the expiry date of your then existing authority. You are not required by any law to sign these authorities. But an authority may be required by licensed or registered persons, for example, to facilitate margin lending to you or to allow your securities or securities collateral to be lent to or deposited as collateral with third parties. The licensed or registered person should explain to you the purposes for which one of these authorities is to be used.   If you sign one of these authorities and your securities or securities collateral are lent to or deposited with third parties, those third parties will have a lien or charge on your securities or securities collateral. Although the licensed or registered person is responsible to you for securities or securities collateral lent or deposited under your authority, a default by it could result in the loss of your securities or securities collateral.   A cash account not involving securities borrowing and lending is available from most licensed or registered persons. If you do not require margin facilities or do not wish your securities or securities collateral to be lent or pledged, do not sign the above authorities and ask to open this type of cash account.

Risk of Holding Assets Outside Hong Kong

Client assets received or held by the licensed or registered person outside Hong Kong are subject to the applicable laws and regulations of the relevant overseas jurisdiction which may be different from the Securities and Futures Ordinance (Cap. 571 of The Laws of Hong Kong) and the rules made thereunder. Consequently, such client assets may not enjoy the same protection as that conferred on client assets received or held in Hong Kong.

Risk of Providing An Authority To Hold Mail or To Direct Mail To Third Parties 

If you provide us with an authority to hold mail or to direct mail to third parties, it is important for you to promptly collect in person all contract notes and statements of your account and review them in detail to ensure that any anomalies or mistakes can be detected in a timely fashion. 

Risk of Trading Renminbi (RMB) Products

A RMB product may include a wide range of investment products denominated or settled in RMB or have exposure to RMB-linked assets or investments.  In general, a non-Mainland (including Hong Kong) investor who holds a local currency other than RMB will be exposed to currency risk.  The exchange rate of RMB may rise or fall. Further, RMB is subject to conversion restrictions and foreign exchange control mechanism.  You should check with your investment adviser or seek professional advice to find out if there is any secondary market for the RMB product you plan to invest in and its liquidity. You should also find out whether the product is subject to any lock-up period or heavy penalty or charges for early surrender or termination of the product.  The assets that the products invest in or referenced to may fall as well as rise, resulting in gains or losses to the product.  You may not be able to sell your investment in the product on a timely basis, or you may have to sell the product at a deep discount to its value.  You should consider carefully the creditworthiness of the issuers before investing.  Counterparty risk may also arise as the default by the derivative issuers may adversely affect the performance of the RMB products and result in substantial losses.  Depending on the nature of the product and its investment objective, there may be other risk factors specific to the product which you should consider.  Before making an investment decision, investors should read the risk factors as set out in the offering documents and seek professional advice where necessary. 

Derivative Products Features & Trading Risks

Derivative Products, such as Warrants and Callable Bull/Bear Contracts (CBBCs), are financial instruments which derive their value by reference to the price or value of an “Underlying Asset”.  The Underlying Asset may be a security, stock indices, currency, commodity or other assets or combination of such assets.  Derivative Products are usually issued by a third party, usually an investment bank, independent of the issuer of the Underlying Asset.  Derivative Products are subject to both actual and perceived measures of the credit worthiness of their issuers. There is no assurance of protection against a default by their issuers in respect of their payment obligations. In case the issuers are insolvent, investors may get nothing back and the potential maximum loss could be 100% of the investment amount.  Trading and investment in Derivative Products involves HIGH RISKS.  Investors are strongly advised to have a thorough understanding of the terms and conditions of a Derivative Product(s) before trading in such product(s).  

Features & Trading Risk of Warrants

a) Features:  Warrants are an instrument that gives an investor the right to “buy” or “sell” an underlying asset at a pre-set price prior to a specified expiry date. They may be bought and sold prior to their expiry in the market provided by Hong Kong Exchange. At expiry settlement is usually made in cash rather than a purchase or sale of the underlying asset. Derivative warrants can be issued over a range of assets, including stocks, stock indices, currencies, commodities, or a basket of securities. Warrants traded in Hong Kong normally have an initial life of 6 months to 2 years.  Holders of call (or put) warrants have the right, but not obligation, to purchase from (or to sell to) the warrant issuer a given amount of the underlying asset at a pre-determined price within a certain time period.

b) Trading Risk:  Warrant trading involves high risks and may not be suitable for every investor. Warrant holders are unsecured creditors of an issuer and they have no preferential claim to any assets an issuer may hold. Therefore, investors are exposed to the credit risk of the issuer. Although Warrants may cost a fraction of the price of the underlying assets, a Warrant may change in value more or less rapidly than the underlying asset. In the worst case the value of the Warrants falls to zero and holders lose their entire investment amount. Unlike stocks, Warrants have expiry date and unless they are in-the-money, they become worthless at expiration. Investors should be aware that other factors being equal, the value of Warrants will decrease over time.  Therefore, Warrants should never be viewed as products that are bought and held as long term investments.

Features and Trading Risk of CBBCs

a) Features:  CBBC are a type of derivative product that tracks the performance of an underlying asset without requiring investors to pay the full price required to own the actual asset. They are issued either as Bull or Bear contracts with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying asset. CBBCs are issued with the condition that during their lifespan (normally 3 months to 5 years) they will be called by the issuers when the price of the underlying asset reaches a level (known as the “Call Price”) specified in the listing document. If the Call Price is reached before expiry date, the CBBC will expire early and the trading of that CBBC will be terminated immediately. 

b) Trading Risk:  CBBC have a Mandatory Call feature (also referred to as a Knock-out feature).  A CBBC may be called by the issuer when the price of the Underlying Asset hits the Call Price and the CBBC will then expire early.  Payoff for certain types of CBBC will be zero when there is a Mandatory Call.  When other types of CBBC expires early the holder may receive a small amount of residual value payment in accordance with the CBBC listing document, but there may be no residual value payment in adverse situations and the investor may suffer a total loss.  You should therefore read the listing document and relevant supplemental document carefully to ensure that you understand the nature of and risks associated with your investment.  Once the CBBC is called, even though the Underlying Asset may bounce back in the right direction, the CBBC which has been called will not be revived and investors will not be able to profit from the bounce-back.  Trades inputted by the investor may still be executed and confirmed even after a Mandatory Call since there may be some time lapse between the event triggering a Mandatory Call and the suspension of the CBBC trading.  Any trades executed after the Mandatory Call event will not be recognized and will be cancelled.  The issue price of a CBBC includes funding costs. Funding costs are gradually reduced over time as the CBBC moves towards expiry. The longer the duration of the CBBC, the higher the total funding costs. In the event that a CBBC is called, investors will lose the funding costs for the entire lifespan of the CBBC. The formula for calculating the funding costs are stated in the listing documents.

Features & Trading Risk of Exchange Traded Funds (ETFs)  

a) Features:  ETFs are passively-managed and open-ended funds traded on the securities market of HKEx and authorized by the SFC as collective investment schemes. ETFs are designed to track the performance of their underlying benchmarks (eg an index, a commodity such as gold, etc).  The transaction costs for trading ETFs at HKEx are the same as those for trading other securities.  ETFs can be traded any time during the trading hours of the securities market.  Most ETFs track a portfolio of assets to provide diversified exposure to selected market themes but it may also track a single underlying asset such as gold.  While some ETFs provide Hong Kong investors access to a basket of Hong Kong securities, others provide the investors access to overseas markets or other asset classes.  ETFs can be broadly grouped into two types:  1) Physical ETFs (ie traditional or in-specie ETFs): Many of these ETFs directly buy all the assets needed to replicate the composition and weighting of their benchmark (eg constituents of a stock index). However, some only buy a portion of the assets needed to replicate the benchmark or assets which have a high degree of correlation with the underlying benchmark but are not part of it. Some physical ETFs with underlying equity-based indices may also invest partially in futures and options contracts. Lending the shares they own is another strategy used by some physical ETFs; and  2) Synthetic ETFs: These ETFs do not buy the assets in their benchmark. Instead, they typically invest in financial derivative instruments to replicate the benchmark’s performance. ETFs are required to have collateral when investing in derivatives (details of the net and gross counterparty exposure and types and composition of the collateral are published on the ETF’s website).  An ETF’s net risk exposure to any single counterparty (ie net of the value of any collateral provided) cannot be more than pre-determined percentage of its NAV (currently 10%).  Investors should read the ETF prospectus carefully to ensure they understand how the fund operates.

b) Trading Risks:

Market risks:  ETFs are exposed to the economic, political, currency, legal and other risks of a specific sector or market related to the index that it is tracking. ETF managers do not have the discretion to take defensive positions in declining markets. Investors must be prepared to bear the risk of loss and volatility associated with the underlying benchmarks.

Counterparty risk:  Synthetic ETFs are subject to counterparty risk associated with the derivatives issuers and may suffer losses if the derivatives issuers default or fail to honour their contractual commitments.  Further, potential contagion and concentration risks of the derivative issuers should be taken into account (eg since derivative issuers are predominantly international financial institutions, the failure of one derivative counterparty of a synthetic ETF may have a “knock-on” effect on the other derivative counterparties of the synthetic ETF). Although synthetic ETFs have collateral from their counterparties, it may not completely remove the counterparty risk so they are still subject to the collateral providers fulfilling their obligations. There is a further risk when the right against the collateral is exercised because the market value of the collateral could be substantially less than the amount secured, resulting in significant losses to the ETF.

Tracking error risk:  Tracking error is the difference between the performance of an ETF and its underlying benchmark.  Tracking error can arise due to factors such as the impact of the Total Expense Ratio (TER), changes in the composition of the underlying benchmark and type of ETF (e physical vs synthetic). The TER of an ETF may include management fee and other fees and costs (eg transaction costs, stamp duties, costs for preparing financial reports and other prescribed documentation, legal and auditing fees, insurance costs, fees for custody services, etc) – there is no universal definition. An ETF’s estimated TER is stated in the prospectus. The estimated TER of an ETF does not necessarily represent the fund’s tracking error because the fund’s NAV may be affected by other factors, eg dividends and other income from the portfolio, and in the case of a synthetic ETF, the indirect costs borne by the fund may only be reflected in the market value of the derivatives it holds.

Risk in trading at discount or premium to NAV:  The market price of an ETF may be at a discount or premium to its NAV. This price discrepancy is caused by supply and demand factors and may be more likely to emerge during periods of high market volatility and uncertainty. This phenomenon may also be observed in ETFs tracking specific markets or sectors that are subject to direct investment restrictions. As a result, investors who buy at a premium may suffer losses even if the NAV is higher when they sell and they may not fully recover their investment in the event of termination of the ETF.

Liquidity risk:  Although ETFs usually have market makers (known as Securities Marker Makers, or SMMs) to help provide liquidity, there is no assurance that active trading will be maintained at all times. In the event that the SMMs are unable to fulfil their obligations, investors may not be able to buy or sell the ETF or may find the market price of the ETF is at a discount or premium to its NAV.

Stock lending risk:  Physical ETFs which engage in stock lending face the risk of the borrower not returning the ETF’s securities as agreed and thus may experience some losses due to their stock lending.

Risks of Trading Equity Linked Instruments (ELIs)

ELIs are hybrids of deposits/notes and options that may allow a bull, bear or strangle (trading range) bet. The return of ELIs is usually determined by the value of a single stock, a basket of stocks or an index at a future valuation date.  In deciding whether to trade, you should be aware of the inherent risks:  a) You may suffer capital loss should the price of the underlying shares go against your bet.  In extreme cases, you may lose your ENTIRE Capital.  b) The return on investment is predetermined by the terms specified in the ELI. So even if your view of the direction of the underlying stock price is correct, you will not gain more than the specified amount.  c) The return payable for the ELI is determined at a specified time on the valuation date, irrespective of the fluctuations in the underlying stock price before or after that specific time.  d) Unlike traditional time deposits, there is NO guarantee that you will get a return on your investment or any yield.  e) You should be aware of potential default risk of the ELI issuers. 

This statement does not disclose all of the risks and other significant aspects of trading in ELI In light of the risks, you should undertake such transactions only if you understand the nature of ELI and the extent of your exposure to risk. Trading in ELI is not suitable for many members of the public.  You should carefully consider whether trading is appropriate for you in light of your experience, objective, financial resources and other relevant circumstances.

Risk of Trading Bonds

Investors should give careful considerations to the risk factors:, default/ credit, interest rate, exchange rate, liquidity, reinvestment/ call risk, equity, inflation and event risk.

There is a risk that the issuer may fail to pay you the interest or principal as scheduled.  When the interest rate rises, the price of a fixed rate bond will normally drop, and vice versa.  Moreover, longer-term bonds are more sensitive to interest rate changes than shorter-term bonds. It follows that the shorter a bond's term, the lesser the impact of such a discount on its value, and the lesser the impact that interest rate changes will have on its value.  If your bond is denominated in a foreign currency, you face an exchange rate risk.  You may not be able to sell your bond if the liquidity of the secondary bond market is low.  Issuer may redeem the bond before maturity.  If this happens and you have to re-invest the proceeds, the yields on other bonds in the market will generally be less favourable.  If your bond is "convertible" or "exchangeable", you also face equity risk associated with a fall in stock price.  It will usually cause the bond price fall.  Inflation is therefore a serious concern for those who need to rely on the regular income from bonds.  A corporate event such as a merger or takeover may lower the credit rating of the bond issuer. In case the corporate restructurings are financed by the issuance of a large amount of new debt-burden, the issuer's ability to pay off existing bonds will be weakened.

Risks of Trading Stock Options

A stock option is a financial contract based on single underlying stock which is traded on the Stock Exchange of Hong Kong. Two major types of options are CALL options and PUT options.  A call option buyer has the right to buy the underlying stock at the strike price (i.e. pre-determined price) on or before the expiry day, while a call option seller has the obligation to sell the underlying stock at the strike price upon exercise on or before the expiry day.  A put option buyer has the right to sell the underlying stock at the strike price on or before the expiry day, while a put option seller has the obligation to buy the underlying stock at the strike price upon exercise on or before the expiry day. 

a)  Variable degree of risk

You should calculate the extent to which the value of the options must increase for your position to become profitable, taking into account the premium and all transaction costs.  The purchaser of options may offset or exercise the options or allow the options to expire.  The exercise of an option results either in a cash settlement or in the purchaser acquiring or delivering the underlying interest.  If the purchased options expire worthless, you will suffer a total loss of your investment which will consist of the option premium plus transaction costs.  If you are contemplating purchasing deep-out-of-the-money options, you should be aware that the chance of such options becoming profitable ordinarily is remote.  Selling (“writing” or “granting”) an option generally entails considerably greater risk than purchasing options.  Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. The seller will be liable for additional margin to maintain the position if the market moves unfavourably.  The seller will also be exposed to the risk of the purchaser exercising the option and the seller will be obligated to either settle the option in cash or to acquire or deliver the underlying interest.  If the option is “covered” by the seller holding a corresponding position in the underlying interest or another option, the risk may be reduced.  If the option is not “covered”, (known as “naked”), the risk of loss can be unlimited. Certain exchanges in some jurisdictions permit deferred payment of the option premium, exposing the purchaser to liability for margin payments not exceeding the amount of the premium.  The purchase is still subject to the risk of losing the premium and transaction costs.  When the option is exercised or expires, the purchaser is responsible for any unpaid premium outstanding at that time.

b)  Terms and conditions of contracts

You should should ask the firm with which you deal about the terms and conditions of the specific options which you are trading and associated obligations (e.g. the expiration dates and restrictions on the time for exercise).  Under certain circumstances the specifications of outstanding contracts (including the exercise price of an option) may be modified by the exchange or clearing house to reflect changes in the underlying interest.

c)   Suspension or restriction of trading and pricing relationships

Market conditions (e.g. illiquidity) and/or the operation of the rules of certain markets (e.g. suspension of trading in any contract or contract month because of price limits or “circuit breakers”) may increase the risk of loss by making it difficult or impossible to effect transactions or liquidate/offset positions.  If you have sold options, this may increase the risk of loss. Further, normal pricing relationships between the underlying interest and the future, and the underlying interest and the option may not exist.  This can occur when, for example, the interest underlying the option is subject to price limits while the option is not.  The absence of an underlying reference price may make it difficult to judge “fair value”.

Stock options involve a high degree of risk. Losses from options trading can exceed your initial margin funds and you may be required to pay additional margin funds on short notice.  Failure to do so may result in your position being liquidated and you being liable for any resulting deficit. You must therefore understand the risks of trading in options and should assess whether they are right for you. You are encouraged to consult a broker or financial adviser on your suitability for options trading in light of your financial position and investment objectives before trading.