As financial markets continue to evolve, investors have begun seeking more effective investment tools to increase their returns. To meet investor demand, Hong Kong Exchanges and Clearing Limited (HKEX) has launched a series of stock futures contracts, the underlying stocks for which are listed on its wholly-owned subsidiary, Hong Kong Joint Stock Exchange Limited (Joint Stock Exchange). These contracts feature high liquidity and active trading volume. Investing in stock futures allows investors to participate in the performance of individual listed companies while also enjoying benefits such as short selling and leverage offered by the derivatives market.

Since stock futures represent leading companies within their respective industries, investors who believe that the performance of a particular industry will outperform or underperform the overall stock market can choose to invest in the stock futures of that industry accordingly

Basic Definition

A stock futures contract is an agreement to buy or sell a financial instrument equivalent to a specified quantity (contract size) of a specific stock at a predetermined price (the initial margin price) on a future, fixed date

All stock futures contracts are cash-settled, and there is no physical delivery of shares when the contract expires

Contract expires

The profit or loss amount, calculated as the difference between the initial agreement price and the final settlement price multiplied by the contract multiplier, will be debited from the account of the contract holder

The final settlement price is the official closing price reported on The Stock Exchange of Hong Kong on the last trading day for the relevant stock

If investors in stock futures wish to close their positions before the contract expires, those who initially sold short only need to buy back a futures contract, while those who bought contracts need to sell one

Security deposit

When trading futures, both buyers and sellers must first pay a margin as security for fulfilling the contract. The clearing house will calculate profits and losses on all open contracts at the market price after each day’s closing, which serves as the basis for debiting or crediting investor accounts. If unfavorable market conditions result in an investor incurring losses and their margin falls below the stipulated level, the exchange will require the investor to top up their account within a specified timeframe to maintain the original margin level (i.e., cover the shortfall).

Advantages

• Transaction fees are low: Each stock futures contract is equivalent to the value of thousands of shares of stock, and the commission for buying or selling contracts depends on the number of contracts, so transaction costs are very low relative to the contract value
• Short selling stocks is now easier: Investors can profit in a declining market by short selling stock futures, as they can do so conveniently
• Market makers are required by Hong Kong Exchanges and Clearing to simultaneously provide bid and ask prices within a specified spread to ensure market liquidity
• Leverage allows investors to buy or sell stock futures contracts by paying only a small portion of the contract’s face value, making hedging and trading more cost-effective
• Reducing Foreign Exchange Risk for Overseas Investors: Stock futures contracts provide a way for overseas investors to invest in high-quality local stocks, as buying and selling stock futures requires only margin deposits rather than the full contract value, significantly reducing the foreign exchange risk faced by overseas investors
• Trading is conducted through an electronic trading system: stock futures contracts are bought and sold using the exchange’s electronic trading system. All orders are executed on a price and time priority basis, and buy prices, sell prices, and transaction prices are displayed in real-time, achieving the highest level of market transparency.
• The clearing house provides performance guarantees: stock futures contracts will be registered, cleared, and have performance guarantees provided by Hong Kong Futures Clearing Company Limited (the Clearing House), which is wholly owned by the exchange. Since the Clearing House acts as the counterparty for all open positions, participants in the exchange will not need to bear counterparty risk. However, the scope of the guarantee does not include the financial obligations of exchange participants to their clients; investors must exercise caution when selecting a broker.

Dealer system

Market participants may register as market makers for individual stock futures, providing both bid and ask prices within a specified maximum spread. Exchange participants and their clients should note that individual stock futures may not have market maker registrations offering bid-ask spreads, and trading will be based on market order units. Investors should be aware that trading in stock futures without market maker registration may involve liquidity risk and should carefully consider before entering the market.

The risks of trading stocks and futures

Stock futures involve high risk, and losses from buying or selling stock futures may exceed the margin deposited at opening a position, potentially requiring you to pay additional deposits in a short period. If these payments are not made, your positions may be closed out, and any resulting losses will be borne by you alone. Therefore, you must clearly understand the risks of trading stock futures and assess whether they are suitable for you. Before conducting transactions, you should consult with a broker or financial advisor based on your own financial situation and investment goals to determine if buying and selling futures and options contracts is appropriate.

Adjust comments

If a company changes its equity structure through share offerings or bonus shares, it may lead to changes in the stock price at net asset value or on the effective date, and this may affect open positions

If all other factors remain the same, the value of a shareholder’s portfolio will not change on the net asset value date, but this is different for buyers or holders of stock futures unless appropriate adjustments are made to the futures contract. Without adjusting the par value and if the multiplier of the stock futures contract remains unchanged, an adjustment in the stock price will have unreasonable and unfair effects on the value of the stock futures position.

The clearing house decides to adjust the ratio based on the principle of maintaining the fair value of futures contracts, and will only make adjustments when there are significant changes. Hong Kong Exchanges and Clearing will announce the details of the adjustment, and exchange participants must inform their clients about the changes.

Stock futures contracts overview

Stock Futures Contract Overview

Information Provider Code

Information Supplier Code

Reference materials

Hong Kong Exchanges and Clearing - Derivatives / Individual Stocks / Stock Futures HKEX_Stock_Futures_SC.pdf