Primary and Secondary Markets
This topic follows a security through its whole life: how a company first raises capital, how those shares then trade, and how further capital is raised along the way. The exam tests IPO mechanics, corporate actions, secondary-trading order types, clearing and settlement, and the costs an investor actually pays.
Primary versus secondary markets
The distinction is fundamental and frequently tested. In the primary market a security is created and sold for the first time and the proceeds go to the issuer, as in an initial public offering (IPO) or a new bond issue. In the secondary market existing securities change hands between investors and the issuer receives nothing; its purpose is to provide liquidity and price discovery, so that a holder can sell and a new market price continuously emerges. The two markets support each other: investors will only subscribe to a primary offering if they trust the secondary market to let them exit later. A watch-point on new bonds: the issuer sets the coupon and receives the money in the primary market, but thereafter the bond's price floats in the secondary market with interest rates and credit.
IPO mechanics and the listing syndicate
A Hong Kong IPO is built around defined roles. The sponsor, a firm licensed for Type 6 (advising on corporate finance), conducts due diligence and deals with the Exchange and SFC. Underwriters agree to take up any shares not bought by the public, transferring placement risk from the issuer; sub-underwriters spread that risk further. The prospectus is the legally vetted disclosure document that must be registered before it is issued to the public. Shares can reach the market by an offer for subscription (brand-new shares, money to the company), an offer for sale (existing shares, money to the selling shareholder), a placing (shares placed with selected investors) or, rarely, an introduction (a listing with no new shares issued because the stock is already widely held). Bookbuilding gauges demand to set the price within a published indicative range; cornerstone investors commit early to large allocations with a lock-up; an over-allotment option (greenshoe) lets underwriters sell extra shares and later cover, supporting price stabilisation, which is tightly limited and cannot push the price above the offer price. A clawback shifts more shares to the retail tranche when the public offer is heavily oversubscribed, and the basis of allocation sets out how scarce shares are shared out. HKEX's FINI platform has shortened the time from pricing to first trading.
Special listing structures
Beyond the classic IPO, Paper 8 expects familiarity with newer structures. A weighted voting rights (WVR) listing lets founders hold shares with extra votes, concentrating control while outside investors hold ordinary one-vote shares. A Special Purpose Acquisition Company (SPAC) raises cash in its IPO with no operating business, intending to acquire a target later (the de-SPAC). A secondary listing lets a company already listed abroad list on SEHK while keeping its primary listing overseas, whereas a dual-primary listing subjects it fully to both regimes. Under Stock Connect, 'Southbound' trading is Mainland investors buying Hong Kong-listed stocks, while 'Northbound' is Hong Kong and international investors buying eligible Mainland A-shares. A listed company must also maintain a minimum public float (commonly 25%, subject to exceptions for very large issuers) so that a genuine open market exists; confirm the current thresholds against the Listing Rules, which are periodically amended.
Raising more capital and corporate actions
Listed companies return to the market in several ways. A rights issue offers existing shareholders new shares pro rata, usually at a discount; the entitlement can trade separately as 'nil-paid rights', which represent the right (not yet paid for) to subscribe. An open offer is similar but the entitlement is not tradable. A top-up placing (placing and subscription) lets a controlling shareholder sell existing shares to placees and then subscribe for the same number of new shares, raising money for the company while keeping their stake roughly constant. These raise new money. By contrast, a bonus (scrip) issue capitalises reserves into free shares and a stock split subdivides shares, both increasing share count without raising cash, so the price adjusts down proportionately and total value is unchanged; a share consolidation (reverse split) does the opposite. A scrip dividend lets shareholders take new shares instead of cash. The ex-dividend and record dates matter because a buyer on or after the ex-date does not receive the declared dividend.
Secondary trading and order types
Shares on SEHK trade in fixed quantities called board lots; amounts smaller than a board lot are odd lots, which trade in a separate, less liquid market. The minimum price movement between quotes, the tick, is set by a spread table that varies with the price band. The trading day has a pre-opening session, where at-auction and at-auction-limit orders accumulate and execute at a single calculated opening price, continuous morning and afternoon sessions, and a Closing Auction Session (CAS) that fixes a fair closing price at day's end. Order types in continuous trading include the enhanced limit order (which can match against several price queues up to its limit) and the special limit order (which matches down through queues but is not booked if unfilled). The Volatility Control Mechanism (VCM) triggers a short cooling-off period when an eligible stock's price would move beyond a set band, and the Exchange can impose a trading halt or suspension to protect an orderly market, for example around a major announcement. Short selling is permitted only as covered short selling of designated securities and is subject to a tick rule that prevents shorting below the best current ask.
Clearing, settlement and transaction costs
On-exchange share trades clear and settle through CCASS (the Central Clearing and Settlement System) on a T+2 basis, meaning two business days after trade. Under Continuous Net Settlement (CNS), a participant's many trades in the same stock on a day are netted to a single delivery obligation; if a seller fails to deliver on T+2, HKSCC may execute a buy-in to obtain the shares. Settlement is by book entry in dematerialised form, and shares are commonly registered in the name of HKSCC Nominees Limited while investors hold a beneficial interest through their broker. Costs are a favourite exam target. Government stamp duty is an ad valorem charge on transfers of Hong Kong stock, levied on both buyer and seller; at a rate of 0.1% each side, a HK$200,000 purchase (for example 5,000 shares at HK$40) attracts about HK$200. Stamp duty is the government-imposed cost, distinct from broker commission (deregulated and negotiable since the minimum-commission regime ended), the SFC transaction levy, the AFRC levy, the HKEX trading fee and the CCASS settlement fee. Treat every specific rate here as edition-sensitive and confirm it against the current HKEX and SFC schedules, as stamp duty and levy rates are revised from time to time.
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In the HKSI LE Paper 8 (Securities) guide: 12 worked calculations set inside the 6 chapters, where the maths comes up. Practice here stays free.