International Investments: Beginners Guide to the Hong Kong Forex Market
Buying foreign stocks in Hong Kong may seem intimidating but only because it can be confusing for someone who is new to trading.
Probably the most important question on your mind is, why buy foreign stocks in Hong Kong?
According to the data published on the website of HKTDC Research, “Hong Kong is a highly attractive market for foreign investment (FDI).” In fact, the data revealed that the FDI inflows to Hong Kong reached US$103 billion in 2014 – all of this from around the globe. When it comes to the outflows, Hong Kong is second only to the US with US$143 billion.
In another site, the South China Morning Post revealed that there is a greater opportunity for diversity in the HK market – thanks to the opening of the Shenzhen-Hong Kong Stock Connect.
With the success of the Shanghai-Hong Kong Stock Connect since 2014, it is expected that investors would be flooding in looking for foreign shares to invest in. Both stocks connect is expected to complement each other and that would lead to promotions from both ends that would benefit investors from all over the world.
Of course, the strength of the Hong Kong Stock Exchange is propelled by the financial service sector that the region is internationally known for. Add to that the presence of the companies from mainland China, you can expect that your investment in Hong Kong will be rewarding – as long as you know what market to invest in.
How to buy foreign stocks in Hong Kong
There are many ways that one can invest in the Hong Kong Stock Exchange but here are 4 different options that can help you get started:
Through ETFs
The first option is to look for promising Exchange-Traded Funds. This is actually an indirect way for you to own Hong Kong stocks. If you want to lessen the currency risk that is prominent in overseas investing, this is the best option for you. Among the funds that you can choose from includes the following:
- Hong Kong AlphaDEX. This is a 3-year-old fund that tracks the stock markets in Hong Kong through a match-up with the Defined HK Index.
- iShares MSCI Hong Kong Index Fund. This 19-year-old fund invests in the financial industry – usually in mid-cap to large-cap stocks. It has an asset value of $3.57 billion and is diversified across 40 holdings.
- iShares MSCI Hong Kong Small-Cap ETF. This invests in small-cap stocks with 90 stocks that are estimated to have an asset of $9.10 million.
Through DRS
Depository Receipts (DR) are probably the most hassle-free yet direct option to invest in foreign stocks in Hong Kong. Depending on where you are from, you can select from Hong Kong Stocks that are listed as depository receipts on local stock exchanges.
For instance, you can choose HK stocks that are listed as ADRs or American Depository Receipts in NASDAQ or NYSE. The choices are limited but if you are only looking to diversify your portfolio, this could be good enough for you. Take note that there are also European Depository Receipts and Global Depository Receipts that you can look into for options.
Local brokerage dealing with International Trading
You also have the option to invest directly through a local brokerage that specializes in International Trading. Of course, you will get access to stocks from other countries as well – not just Hong Kong. It is very important to choose the right company to work with and to understand the commission structure and the fees of the firm.
Direct investment through a Hong Kong broker
Finally, you have the option to search for a broker based in Hong Kong and invest online. Of course, you have to deal with restrictions since some brokerage companies have rules for investors from certain countries.
For instance, HK brokerages that are not SEC-registered cannot take on American investors as clients. Do a background check on the company and make sure you understand the services that they offer, and the extent to which your investments can grow despite the restrictions.
Benefits of buying foreign stocks
Placing your money in a foreign stock is not an easy decision to make. If you think that investing in a local market is tough, overseas investing is probably harder. It is true that it offers great rewards but the risks are definitely higher than investing back home. Not only that, it can be quite difficult to find the right investment that will help you reach your financial goals.
Despite the added risk, there are two important reasons why you need to consider getting foreign shares:
Diversity
If there is one thing that you should learn about financial success, it is the fact that diversity is your greatest friend. We all know how volatile markets can be and how economies differ between countries.
To protect your finances, you have to put your money in several baskets with varying degrees of risks – in this case, each basket could mean a different country. The economy in Hong Kong, for instance, do not always move in sync with that of Singapore.
By spreading your investment across uncorrelated assets, you get to spread the risk of losing all your investments.
Increased returns due to exchange rates
The second reason to invest in foreign shares is the exchange rate. If you invest during a time when your local currency is strong against the HK Dollar, the growth of your investment will be greater if you withdraw when the current situation is reversed. The timing is a bit tricky to implement but it can be very rewarding if you are successful.
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