How to Spread Bet on the Hong Kong – Hang Seng Index
If you want a volatile index to give you plenty of excitement and opportunity for profit, then you may have looked at the USA markets. But there is another place where indices can move hundreds of points in a day, and that is on the Asian markets. The Hang Seng Index is simply referred to as the HSI, and it represents a market capitalization-weighted index of 50 large-cap companies that are traded on the Hong Kong Exchange. It includes such corporate names as HSBC (0005:HK) and and China Mobile (0941:HK).
The Hong Kong Stock Exchange opens at 2.30 am UK time and closes at 9.00 am and ranks seventh in the world by market capitalisation. The Asian exchange offers a convenient and easy way to gain exposure to some of the big enterprises operating in China. The Hang Seng Index usually used as an indicator of the health of the Hong Kong economy, and actually covers 65% of the total capitalization of the stock exchange. Here’s a typical chart: –
You can see that it has plummeted in the last few months, giving a great opportunity for profit provided you are comfortable with the risk. The Hong Kong stock exchange is also closely allied to Chinese business, and there is an inevitable interplay between the two.
In fact the Hang Seng Index can be further subdivided into four subcategories, including real estate, finance, energy and utilities, and general commerce and industry. The HSI embraces all of these, and has been quoted since 1969. The reason it is not called the Hong Kong Index is that it is maintained by a subsidiary of the Hang Seng bank. There is also a Hang Seng Composite Index, started just in this century, and this is based on the many more companies that are quoted on the Hong Kong exchange, covering 95% of the exchange’s capitalization.
The Hang Seng Index was started in 1969, but was based on a notional value of 100 in 1964. It has been far higher than its current value, showing a remarkable growth over time having reached a peak of 30,468 in October 2007. As it is an index, its value is measured in comparison to previous values, and is not ready calculated from the share prices.
If you have a clearly defined trading plan, and are comfortable with your risk control measures, the Hang Seng Index can offer you excellent opportunities for spread betting. Depending on your plan, you may want to use guaranteed stop losses. For instance, looking at the chart above you can see in August the value fell directly from 21,700 to 21,000, a large gap, and if you had a long bet on the index at the time, you would have had little opportunity to close it and minimize your losses. You can also plainly see that there were gaps before and after this large drop, and in various other places on the chart, suggesting that this index is one of the riskier ones that you could bet on.
However, guaranteed stop losses do usually require a premium, often taken in the form of a larger spread on the quote which you will pay whether or not your bet is successful. The best advice is to think carefully what a large gap would mean to you and your bet, and make sure that you do not overcommit yourself to a level where you could be caught out.
Another way to get exposure to the Asian market include trading individual Chinese companies such as China Merchants Holdings and China Overseas Land & Investment which are both quoted on the Hong Kong stock exchange; the Hang Seng. China Merchants’ business revolves around administering container and cargo terminals and as such would stand to benefit from an economic recovery. On the other hand China Overseas Land & Investment develops and invests in real estate and infrastructure projects as the name suggests. Of course such plays carry considerable risks; Chinese shares had reached spinning highs in October 2007 only to fall sharply back as fear spread that the Chinese economy was about to experience a hard landing. Other ways to acquire exposure would be to look to spread bet instruments like the Hang Seng H-Share Index ETF which mirrors the Hang Seng China Enterprises Index.
Hong Kong – Hang Seng Index Spread Betting
The Hong Kong Hang Seng Index is currently quoted at 16,636.2 – 16,676.2 with the spread betting company IG Index. Reacting to bad news on the European economy, you think it will fall further and want to place a bet that it will go down. You are betting that it will fall further than 16,636.2, and stake £6 per point.
Say you have figured it out right, and the index continues to fall until it reaches 16,317.8 – 16,357.8, when you decide to close your bet and take the profit.
To calculate how much profit you have made, first you must see how many points the index moved. Because you have a “short” bet, which means you profit when the index falls, you close your bet at the higher number of the quote, which is 16,357.8.
Your bet is placed at 16,636.2, so that is 16,636.2-16,357.8, which is a 278.4 point drop.
The amount you staked was £6 per point, which means that you have a profit of 6 x 278.4 equals £1670.40.
Of course, indices can go up as well as down, and the Hang Seng index is particularly volatile. Say that you placed the same bet as above, but the index started to climb. You might decide that you need to close your bet and suffer a loss this time.
You close your bet when your spread betting provider is quoting 16,689.4 – 16,729.4. Again, as it was a short bet you have to look at the higher number to figure out your point change.
The number of points you lost was 16,729.4-16,636.2. This is a total point loss of 93.2.
As you staked £6 per point, your total loss is 6×93.2. That works out to £559.20.
Next, you take a look at the Hong Kong Hang Seng index futures spread bet, which is due in one month and is currently quoted at 16,592.7 – 16,642.7. You think that in the next month the index will rise higher than this, and place a bet at 16,642.7 for £3 per point.
Even though the bet is not due to close until next month, you keep a track of it and notice that the next week it is much higher at 16,856.3 – 16,906.3, so you decide to take your profit before it falls back. You can close your futures spread bet any time you want, you don’t need to wait until the due date.
Working out your profit, your bet was closed at 16,856.3, and was opened at 16,642.7.
That means that you made a point gain of 213.6.
You staked £3 per point.
Your total profit is 213.6×3, which gives you £640.80.
Once again, if you had not gauged the market correctly, then you might have found that you were holding a losing bet. To avoid losing too much, you should close the bet before the numbers drop too far. Say your spread betting provider quotes you 16,527.6 – 16,577.6. You had bet that the index would go up, so when you close your bet it is at the lower number.
The total number of points you lost is 16,642.7-16,527.6, which is 115.1.
That means you lose 115.1 times £3, for a total loss of £345.30.
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