FAQ

Trading

Associated Risks

B Shares

B Shares

What are the specific risks for B-shares?

  1. In general, the B-shares market is not as liquid as the A-shares and H-shares markets. A sudden surge in supply or demand of a particular stock may cause an exaggerated movement in the share price.
  2. Shanghai B-shares are traded in USD and Shenzhen B-shares in HKD, so investors should take into consideration the currency risk exposures.

Last Update: 2016-07-08

Structured Products

What are the associated risks in investing structured notes?

Investing in structured notes involves directional price risks. The price of the underlying asset may go up or down, which may adversely affect the return on investment in structured notes.

Investing in structured notes involves price volatility risks. The price volatility of the underlying asset may increase or decrease. Within the period of time that the investor is holding positions in structured notes, abrupt changes in the price volatility of the underlying asset may adversely affect the return of investments in structured notes.

Structured notes are mostly non-listed securities where transferability and liquidity in the secondary market may be highly restrictive. Such restrictions on transferability or the lack of liquidity (as the case may be) may adversely affect the ability of investors in structured notes to employ the best strategy to secure investment returns.

Investing in structured notes also involves credit risks. The risk of default by the issuers of structured notes could prevent the holders from redeeming the investment principal from the issuers and adversely affect their rights of claim for the full amount of the investment returns that they could otherwise be entitled to.

Last Update: 2016-07-08

Bonds

What are the associated risks in investing in bonds?

Default Risk
Although a bond issuer promises to pay interest to the bondholder, this interest income is not risk free unless the investor can ensure that the bond issuer will not default on their obligation. While a US government bond may be treated as free of default risk, this is not true for corporate bonds. Therefore, US Treasuries are used as a benchmark in the bond market.
High-yield bonds are classed purely by credit risk. That is, the risk that a debt holder wont receive the interest payment and principal in full and on time.
Credit Risk
How can you determine the repayment ability of a bond issuer? Many investors place a great deal of reliance on the ratings provided by the major rating agencies. There are several credit rating agencies which assign ratings to bonds, the most prominent of which are Standard and Poors (S&P); Moodys Investor Service and Fitch IBCA. They use a rigorous methodology to determine the ability of the issuers to repay their debts.
The top rating is AAA by S&P and Aaa by Moodys. S&P applies on each rating class a suffix + or - (e.g. AA+) to provide a finer gradation of that rating. Moodys also applies numerical modifiers 1,2 and 3 (with descending order of its generic rating category) in each rating classification from Aa to Caa.
e.g. (1) For a MTRC bond, (coupon: 7.5%, maturity: 8 November, 2010), it is rated Aa3 by Moodys, AA by S&P and AA- by Fitch IBCA.
e.g. (2) For a HSBC Finance Corp bond, (coupon: 5.25%, maturity: April 15, 2015), it is rated Aa3 by Moodys, AA- by S&P and AA- by Fitch IBCA.
The following table lists the rating used by the rating agencies:
 CREDIT RATINGS - LONG TERM DEBTS
Credit RiskMoodysStandard & PoorsFitch IBCA
INVESTMENT GRADE   
Highest qualityAaaAAAAAA
High quality (very strong)Aa1AA+AA+
High quality (very strong)Aa2AAAA
High quality (very strong)Aa3AA-AA-
Upper medium grade (strong)A1A+A+
Upper medium grade (strong)A2AA
Upper medium grade (strong)A3A-A-
Medium gradeBaa1BBB+BBB+
Medium gradeBaa2BBBBBB
Medium gradeBaa3BBB-BBB-
NON-INVESTMENT GRADE   
Lower medium grade (somewhat speculative)BaBBBB
Low grade (speculative)BBB
LOW GRADE   
Poor quality (may default)CaaCCCCCC
Highly speculativeCaCCCC
Extremely poor prospectsCCC
In defaultCDD
Interest Rate Risk
Bond prices and yield are inversely related. When interest rates increase, the bond price will fall. The bondholder will therefore be negatively affected by an interest rate rise.
Long-term bonds are more sensitive to interest rate changes than short-term bonds. In other words, long-term bonds tend to have more interest rate risk.
The relationship between the price and yield of bonds is as follows:
Interest Rate↓  Yield of Bonds↓  Price of Bonds↑ 
Interest Rate↓  Yield of Bonds↑  Price of Bonds↓
Reinvestment Risk
Bondholders may only be able to reinvest their coupons at a lower rate than originally planned. If yields fall, their reinvestment income and consequently their total return from holding the bond will fall relative to the original yield. Conversely, if yields rise, total return will also rise.
Events Risk
The risk comes from a bond issue downgrade by bond rating agencies, a merger or takeover, or an unpredictable event. That will cause the bond price to fall.
Liquidity Risk
An active secondary market is important in the debt market. It provides an exit for bondholders who want to sell back their bond. It is reflected by the bid/ask spread of the bond quote. For some active bond issues, like US Treasuries, the bid/ask spread is generally within 1%. For some illiquid bond issues, the bid/ask spread can jump up to 2% or even higher.
Currency Risk
When the bond is denominated in a foreign currency, it is subject to currency risk. The bondholder will be negatively affected if the exchange changes adversely, resulting in less domestic currency.

Last Update: 2016-07-08

Why should I diversify my investment portfolio?

Regardless of your investment objective, it makes good sense to diversify your portfolio. If one sector class is in the midst of a downturn, the rising value of another sector class may help to offset the negative impact.
For example, say an investor holds a variety of speculative grade and investment grade bonds. The speculative grade bonds can generate greater returns than the investment grade bonds, but they have a relatively higher risk level. However, the investment grade bonds are capable of weathering economic downturns.

Last Update: 2016-07-08

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