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Hong Kong was originally ceded to the British Empire in 1842 by the Chinese Qing Dynasty at the end of the First Opium War, making the city a British crown colony. After the British won the Second Opium War in 1860, the Qing Dynasty also ceded nearby Kowloon.
Hong Kong was later leased to the British for 99 years in 1898. Hong Kong returned to Chinese rule in 1997 when it became a Special Administrative Region (SAR) of the People’s Republic of China.
Financial markets in Hong Kong have a long history and began operating with the establishment of the first stock exchange there in the late 1800s. Hong Kong has since become a leading international financial center with an extremely active and liquid securities market.
The financial sector represents almost 19% of the city’s gross domestic product (GDP). Also, because of the city’s location, strong financial infrastructure and history, it often acts as a gateway for foreign firms looking to access markets in Mainland China.
Another major advantage of operating in the Hong Kong financial markets is the fact that there are no controls over the movement of capital. You won’t pay local tax on dividend income or capital gains in Hong Kong.
About the Hong Kong Stock Exchange
The Hong Kong Stock Exchange (SEHK) was established in 1891, and it currently ranks as the world’s 5th largest stock exchange with a market capitalization of $4.4 trillion. In 1999, Hong Kong’s Financial Secretary announced significant reforms to the stock and futures market.
Those reforms included merging the Stock Exchange of Hong Kong Limited (SEHK) with the Hong Kong Futures Exchange (HKFE) and the Hong Kong Securities Clearing Company Limited into a single entity that became the HKEX holding company. The merger of those 3 entities was announced in 1999 and their operations were consolidated in March 2000.
The SEHK, Shanghai and Shenzhen stock exchanges represent the lion’s share of securities turnover in Asia and have a total market capitalization in excess of $10 trillion. The SEHK’s oldest and main stock market index is the Hang Seng index, which comprises 50 of the largest companies listed on the SEHK. The index was launched in 2001 to provide a broader benchmark that covers roughly 95% of the SEHK’s total market capitalization.
The Hong Kong dollar (HKD) is the currency used in Hong Kong and is currently ranked 14th by the Bank for International Settlements (BIS) among the most actively traded world currencies by global turnover. The Hong Kong Securities and Futures Commission (HKSFC) is Hong Kong’s primary financial regulator and is responsible for overseeing trading in the local stock, forex and contract for difference (CFD) markets.
Trading Stocks in Hong Kong
Besides the notable tax advantages of trading stocks in Hong Kong, the locale also provides an important venue for investing in Mainland China stocks. Some of the most recognizable Hong Kong stocks include Baidu (Nasdaq: BIDU), Alibaba (Nasdaq: BABA) and Tencent (OTCBB: TCEHY).
The highest concentration of equity in Hong Kong stocks is in the financial sector’s 539 stocks with a market capitalization of over $2.3 trillion. The financial sector is followed by technology services, retail trade, health technology and consumer and nonconsumer durables.
Since ending its open outcry trading method in 2017, all trading on the exchange is done electronically via the exchange’s Automatic Order Matching and Execution System (AMS). The AMS was upgraded in 2000 and the system can be used to trade warrants, commodities, currency pairs and fixed-income products.
If you’re based outside of Hong Kong, many of the stocks of the largest and best capitalized Hong Kong companies listed on the SEHK can be traded on major U.S. stock exchanges through American depository receipts (ADRs).
Regardless of where you trade from, you can open an international brokerage account that gives you access to trade Hong Kong stocks directly on the SEHK or through ADRs on U.S. exchanges.
To begin buying Hong Kong stocks you’ll need to take the following steps:
Step 1: Open a Trading Account.
To trade in any financial market, you need to open a trading account with a reputable broker, whether you’re based in Hong Kong or elsewhere. You can open a local brokerage account with a Hong Kong-based broker as a foreigner, however, keep in mind that restrictions might exist for citizens of certain countries like the U.S.
Stock brokers based outside of the U.S. must be registered with the U.S. Securities Exchange Commission (SEC) and comply with the Foreign Account Tax Compliance Act (FATCA) in order to accept U.S. clients. This is one reason that many local Hong Kong brokers refuse to take on U.S.-based clients.
While considerable hurdles can exist for foreigners opening an account with a local Hong Kong broker, the commission savings can be substantial. For example, Fidelity Investments charges $250 HKD ($32) per trade on the SEHK, while a local broker based in Hong Kong would only charge $8 HKD ($1) per trade.
If you decide to open an account with an international online broker, you may be able to trade select Hong Kong stocks using ADRs listed on U.S. exchanges free of commission. For example, brokers such as Robinhood and E*TRADE offers commission-free trading in stocks and ADRs traded on U.S. exchanges, which would include ADRs on some Hong Kong stocks.
Step 2: Fund a Trading Account.
If you’re based in Hong Kong, you probably have a Hong Kong bank account from which you can transfer funds to a brokerage account. For traders based outside of Hong Kong, many brokers will let you open an account without a minimum deposit, although once you decide to buy stocks, you’ll have to deposit the appropriate amount in the account.
Some brokers — especially those based outside of the U.S. — routinely ask for a minimum deposit to purchase stocks. You’ll also need to provide documents proving your identity and address, and most brokers will screen account holders to determine their level of financial markets experience via a “know your client” (KYC) protocol.
Step 3: Get a Trading Platform.
After completing the steps above, you’ll have a funded stock trading account open with either a stock broker based in Hong Kong or an international broker. If you plan on trading online, you’ll have to obtain access to a trading platform supported by your chosen broker.
Some platforms are web-based while others need to be downloaded onto your desktop computer or mobile device. Make sure you know how to use the platform correctly before entering a live trade.
Step 4: Buy Hong Kong Stock.
You can now begin buying Hong Kong stocks. Your choice of broker will determine whether you can do so directly on the SEHK or through ADRs listed on a major U.S. exchange.
Best Online Brokers for Trading in Hong Kong
For traders based in Hong Kong, a subsidiary of the Hong Kong Shanghai Banking Corp. (HSBC) called HSBC Broking Services Limited provides a complete brokerage service for the SEHK and is fully regulated by the Hong Kong Securities and Exchange Commission (HKSEC). Also, you may be able to access HSBC’s other subsidiaries that include HSBC Broking Forex, HSBC Broking Futures and HSBC Broking Securities.
Traders based outside of Hong Kong can trade stocks directly on the SEHK through an account with major online brokers like Interactive Brokers or Saxo Bank. With Interactive Brokers, you also have the option of trading ADRs on Hong Kong stocks for a considerably reduced commission charge.
You can compare several stock brokers that provide access to the Hong Kong stock market using the convenient table Benzinga has compiled shown below.
Are Hong Kong Stocks a Good Investment?
After a year of mass protests and an economic downturn sparked by the global coronavirus pandemic, Hong Kong stocks have seen some abrupt setbacks. By the end of 2020, however, mainland investors had bought approximately $86 billion of shares on the SEHK, which was the highest volume seen since trading links with offshore exchanges began in 2016.
Also, new Hong Kong companies have raised over $51.3 billion in initial and secondary public offerings. This indicates that the recent underperformance of Hong Kong stocks could be ending.
While the prospects for profitable investing in Hong Kong seem promising, current geopolitical tensions may currently make many large investors wary about committing funds to that region. The current economic environment suggests making cautious investments in sound companies, but only if you have a high tolerance for risk.
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