A complete guide to investing in Hong Kong stock ADR! How to invest ADR in the Hong Kong market?
What is ADR?
ADRs, also known as “American Depositary Receipts”, are ADRs issued by some companies listed on markets outside the United States, such as Hong Kong listed companies, to enable US investors to trade as well.
Suppose there is a Hong Kong company called ABC, and their shares are traded on the Hong Kong Stock Exchange at HK$38 (about $5). When the US Depository Bank purchases shares of ABC in a 2:1 ratio, the corresponding US Depository Certificate is issued. Each ADR represents two shares of ABC common stock, so ADRs are priced at $10 per share ($5 × 2), which ultimately sell for $10.
ADR conversion rates
Of particular note is that the exchange ratio of ADR to the underlying stock is not fixed and this key ratio is entirely determined by the issuer's autonomy. 1 ADR may represent more than one Hong Kong share or less than 1 share. The proportion is determined by the terms of issue. ADR conversion ratios can be set to 1:5, 1:10, or even up to 1:100, such as HSBC ADR of 1:5 and United States ADR of 1:2. All ADR-matched physical shares are centrally held in a designated vault by the issuing bank.
ISSUING ADRS SIMPLIFIES THE PROCESS FOR INVESTORS TO BUY AND SELL FOREIGN STOCKS WITHOUT WORRYING ABOUT EXCHANGE RATE FLUCTUATIONS OR OTHER HASSLES OF CROSS-BORDER TRANSACTIONS, AND NO NEED TO OPEN A DEDICATED OVERSEAS SECURITIES ACCOUNT. Most importantly, investors holding ADRs also enjoy the same benefits as direct holdings, including dividends and capital gains.
Extended Reading:WHAT IS ADR/ADS
What is Hong Kong stock ADR?
Hong Kong stock ADRs are financial instruments traded by Hong Kong-listed companies on the U.S. market. They are issued through local depository institutions in the United States, enabling U.S. investors to easily invest in stocks of non-U.S. companies. For example, if US investors want to invest in Xiaomi, they can invest in Xiaomi shares through the Hong Kong stock market, they can also invest in Xiaomi ADR in the US stock market. As Hong Kong stocks are subject to limited Hong Kong market hours (9:30am to 4:00pm), Hong Kong stock ADRs are traded on the US market, providing night trading opportunities for investors in different time zones.
Hong Kong Stock ADR Index
When analyzing the trends of the Hong Kong stock market, investors need to make a comprehensive assessment of a number of indicators, includingHong Kong Stock ADR Index (HSIADR)is an indicator that should not be ignored. The index tracks the ADR performance of the Hang Seng Index constituent stocks listed in the United States, providing investors with additional market insights. Especially during the Hong Kong market close, HSIADR is able to reflect the expected movements of Hong Kong stocks in the global market and understand important information about the movement of ADR in Hong Kong stocks.
Hong Kong Stock ADR Reference Values
A Hong Kong stock ADR represents the same shareholding and is traded on the US equity market (USD) and the Hong Kong stock market (HKD), respectively. Hong Kong Equity ADRs are deposited by a Hong Kong listed company into a local custody bank and an agreement with the US Depository Bank to issue ADRs in the corresponding proportion by the depositary bank based on the number of custody shares. Due to the earlier trading periods of Hong Kong stocks, their prices usually dominate ADR movements.
However, when important news (such as results) is announced after a Hong Kong stock market close, ADR will be reflected first and affect the next day's Hong Kong IPO. If both have significant spreads (e.g. ± 2%), they are often predictive of margin opportunities and are important benchmarks for cross-market investments.
Benefits of investing in ADRs
Trading flexibility: Break through Hong Kong stock trading hours, offering night trading opportunities to respond to breaking news in real-time, suitable for investors in different time zones.
Low entry threshold: Hong Kong stocks are priced higher, while ADRs do not require direct purchase of stocks that can be invested in.
Supplement to market information: After Hong Kong stocks close, ADR prices can reflect the immediate impact of important news (such as results), providing a reference for the movement of Hong Kong stocks on the next day.
Diversified investments: Some ADRs, such as Alibaba, HSBC, are traded more heavily in U.S. stocks and can be leveraged flexibly with derivatives such as options.
Margin Opportunities: When ADR and Hong Kong equity spreads are significant (e.g. ± 2%), investors can increase the return potential by converting the arbitrage mechanism.
ADR Holders' Rights
Holders of US Depositary Certificates (ADRs) enjoy similar benefits to the original stock, including receiving dividend distributions. However, ADRs can be divided into two types: participatory and non-participatory, but only participatory ADRs have voting rights.
Precautions for investing in ADRs
Exchange rate risk: ADRs use different currency pricing than the original stock, which can significantly affect the value of ADR when exchange rates fluctuate significantly.
LIQUIDITY RISK: THE LIQUIDITY OF ADRS DEPENDS ON THE VOLUME OF TRANSACTIONS, THE PLACE OF TRADE, AND PRICE VOLATILITY. Investors should keep an eye on the trading volume and liquidity of ADRs in a timely manner. If liquidity is low, there is a chance of “no pickup”.
How to trade Hong Kong stocks ADR in Hong Kong?
Futubull connects ADR quotation data from over 200 Hong Kong-listed companies! TRADING HONG KONG SHARES IS EASY IN THREE SIMPLE STEPS!
Step 1: Go online to Futu and sign up for a new account.(Register now)
Step 2: Open an Integrated Account on Futu(Open account now)
Step 3: After logging into the Futubull App, enter the name or code of your core port stock ADR, set the order type and number of transactions, and then click “Buy” to complete the ADR listing. Once the listing is complete, you can go to the Quotation page > Subscription Orders to see the relationship status or modify the order.
Futubull App | HK Stock Quote
opensFutubull AppSelect [Hong Kong Stock], click on [Hong Kong Stock ADR], all Hong Kong stock ADRs are listed at a glance!
