Types of securities

Topic 4 is the widest chapter of Paper 8 and supplies a large share of its calculations. Expect to tell one product from its neighbour (equity warrant or derivative warrant, rights issue or open offer, ETF or L&I product), to work a margin call, a theoretical ex-rights price, a warrant's gearing or an L&I product's compounded return, and to apply the SFC's product rules for funds, ETFs and REITs. The second half of the topic covers money-market instruments, bonds and their pricing, security tokens, derivatives and option strategies. Learn each product's features, who issues it, what can go wrong for the holder and the one formula that goes with it.

33 min read18 sections

Checked on 11 October 2026 against: SFC Circular on listed structured funds (revised 24 July 2026); SFC REIT key regulatory requirements page; SFC Guidelines for Securities Margin Financing Activities (effective 4 October 2019) and press release 19PR26; Code of Conduct Schedule 1 risk disclosure statements; Code on Unit Trusts and Mutual Funds (current version); SFC OFC structure pages; HKEX Main Board Listing Rules Chapters 7, 15, 15A (as amended 1 July 2026), 19B and Appendix E5 (consolidated PDF, 22 July 2026); HKEX ETP, structured products, REIT, stock options and stock short name pages; SFO (Cap. 571) s.170 and Sch. 5; Client Securities Rules (Cap. 571H) s.7; Companies Ordinance (Cap. 622) s.135; IRD stamp duty pages and Stamping Circular No. 4/2024. Part B checked October 2026 against: HKMA, Exchange Fund Bills Information Memorandum (June 2026); SFC, Circular on intermediaries engaging in tokenised securities-related activities (2 November 2023); HKEX, Introduction to Callable Bull/Bear Contracts factsheet (February 2025) and CBBC FAQ; HKEX contract summaries for Hang Seng Index futures and stock options; SFC Handbook, Part II, Section IV (Code on Unlisted Structured Investment Products); standard money-market, bond and option mathematics, with every figure recomputed by script. Independent prep, not endorsed by HKSI Institute or the SFC.

Must-know for the exam

Margin call: made when the loan exceeds the lowest of margin value (market value minus haircut), the client's credit limit or the broker's own trigger (SFC Margin Financing Guidelines para 6.3).
Rights issue: renounceable, nil-paid rights trade, offer open at least 10 business days, underwriting optional; an open offer is not renounceable (Main Board Listing Rules 7.18-7.20, 7.23).
Equity warrants: issued by the company, dilutive, expire 1 to 5 years after issue (LR 15.02). Derivative warrants: issued by third parties, each issue has a liquidity provider (LR 15A.20A).
L&I products: named 'Leveraged Product' or 'Inverse Product' with the factor and 'daily', never 'ETF'; rebalanced daily, so multi-day returns drift from the multiple (SFC circular, revised 24 July 2026).
SFC-authorised REITs: listed on SEHK, at least 90% of after-tax net income distributed, gearing up to 50% of gross asset value, at least 75% in income-producing real estate (SFC, October 2026).
Exchange Fund Bills: HK dollar, discount basis, 91, 182 or 364 days, tendered on yield; price = face / (1 + days/365 x yield) (HKMA EFB Information Memorandum, June 2026).
Bond price moves inversely to yield. Coupon above yield to maturity means a premium; % price change is roughly minus modified duration times the yield change (standard bond maths).
Tokenised securities are traditional securities in a token wrapper: existing rules apply, complexity is judged on the underlying, no mandatory PI-only restriction (SFC circular, 2 November 2023).
CBBC mandatory call: trading ends at once; later trades are cancelled. Category N pays nothing; Category R may pay (lowest price - strike) / entitlement ratio for a bull (HKEX, October 2026).
European put-call parity: C + K/(1 + r)^t = P + S. Covered call caps the upside at the strike; protective put caps the downside; long straddle loses at most both premiums.

On this page · 18 sections

Traps that cost marks

Reversing the ranking. Preference shareholders, not ordinary shareholders, are repaid capital first; ordinary shareholders are last in line.
Applying the non-cumulative rule. Cumulative means arrears pile up and must all be cleared, with the current year's dividend, before ordinary holders get anything.
Mixing up cumulative and non-cumulative. Only cumulative shares carry arrears forward; a missed non-cumulative dividend is gone for good.
Valuing the bonus shares at the cum price. A bonus issue only splits the same value over more shares; the price falls in proportion.
Valuing the right at cum price minus subscription price. The share falls to TERP on the ex date, so the right is worth TERP minus subscription price.
Assuming both offers have tradable rights. Only a rights issue is renounceable; open offer entitlements cannot be sold.
Assuming every rights issue must be underwritten. Underwriting is optional; the big protections are minority approval above 50% and the excess or compensatory arrangements.
Assuming HKEX stock options are European style and cash-settled like index options. Stock options are American style and deliver shares.

Ordinary and preference shares

Ordinary shares carry the residual risk and reward of the company: a vote at general meetings, dividends only when the board declares them, and whatever is left in a winding-up after creditors and preference shareholders are paid. Preference shares give up most voting rights in exchange for priority: a dividend fixed as a percentage of the issue price, paid before any ordinary dividend, and repayment of capital ahead of ordinary shareholders. Hong Kong shares have had no nominal (par) value since 3 March 2014 (Companies Ordinance (Cap. 622) s.135).

Feature	Ordinary shares	Preference shares
Dividend	Variable, declared at the board's discretion	Fixed rate on the issue price, paid before ordinary dividends
Voting	One vote per share in general	Usually none, except on matters affecting their class or when dividends are in arrears (per the articles)
Winding-up	Last: share the surplus after all prior claims	After creditors, before ordinary shareholders
Upside	Unlimited: capital growth and rising dividends	Usually capped at the fixed dividend

•Cumulative: an unpaid dividend is carried forward, and all arrears must be paid before any ordinary dividend.

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LE Paper 8 · Topic 4

Types of securities

33 min read18 sections

Must-know for the exam

Margin call: made when the loan exceeds the lowest of margin value (market value minus haircut), the client's credit limit or the broker's own trigger (SFC Margin Financing Guidelines para 6.3).
Rights issue: renounceable, nil-paid rights trade, offer open at least 10 business days, underwriting optional; an open offer is not renounceable (Main Board Listing Rules 7.18-7.20, 7.23).
Equity warrants: issued by the company, dilutive, expire 1 to 5 years after issue (LR 15.02). Derivative warrants: issued by third parties, each issue has a liquidity provider (LR 15A.20A).
L&I products: named 'Leveraged Product' or 'Inverse Product' with the factor and 'daily', never 'ETF'; rebalanced daily, so multi-day returns drift from the multiple (SFC circular, revised 24 July 2026).
SFC-authorised REITs: listed on SEHK, at least 90% of after-tax net income distributed, gearing up to 50% of gross asset value, at least 75% in income-producing real estate (SFC, October 2026).
Exchange Fund Bills: HK dollar, discount basis, 91, 182 or 364 days, tendered on yield; price = face / (1 + days/365 x yield) (HKMA EFB Information Memorandum, June 2026).
Bond price moves inversely to yield. Coupon above yield to maturity means a premium; % price change is roughly minus modified duration times the yield change (standard bond maths).
Tokenised securities are traditional securities in a token wrapper: existing rules apply, complexity is judged on the underlying, no mandatory PI-only restriction (SFC circular, 2 November 2023).
CBBC mandatory call: trading ends at once; later trades are cancelled. Category N pays nothing; Category R may pay (lowest price - strike) / entitlement ratio for a bull (HKEX, October 2026).
European put-call parity: C + K/(1 + r)^t = P + S. Covered call caps the upside at the strike; protective put caps the downside; long straddle loses at most both premiums.

On this page · 18 sections

Traps that cost marks

Reversing the ranking. Preference shareholders, not ordinary shareholders, are repaid capital first; ordinary shareholders are last in line.
Applying the non-cumulative rule. Cumulative means arrears pile up and must all be cleared, with the current year's dividend, before ordinary holders get anything.
Mixing up cumulative and non-cumulative. Only cumulative shares carry arrears forward; a missed non-cumulative dividend is gone for good.
Valuing the bonus shares at the cum price. A bonus issue only splits the same value over more shares; the price falls in proportion.
Valuing the right at cum price minus subscription price. The share falls to TERP on the ex date, so the right is worth TERP minus subscription price.
Assuming both offers have tradable rights. Only a rights issue is renounceable; open offer entitlements cannot be sold.
Assuming every rights issue must be underwritten. Underwriting is optional; the big protections are minority approval above 50% and the excess or compensatory arrangements.
Assuming HKEX stock options are European style and cash-settled like index options. Stock options are American style and deliver shares.

Ordinary and preference shares

Feature	Ordinary shares	Preference shares
Dividend	Variable, declared at the board's discretion	Fixed rate on the issue price, paid before ordinary dividends
Voting	One vote per share in general	Usually none, except on matters affecting their class or when dividends are in arrears (per the articles)
Winding-up	Last: share the surplus after all prior claims	After creditors, before ordinary shareholders
Upside	Unlimited: capital growth and rising dividends	Usually capped at the fixed dividend

•Cumulative: an unpaid dividend is carried forward, and all arrears must be paid before any ordinary dividend.

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Bonus issues, rights issues and open offers

A bonus (capitalisation) issue allots further fully paid shares to existing shareholders out of reserves or profits, in proportion to their holdings, with no money paid (Main Board Listing Rules 7.28). Nobody becomes richer: there are more shares, each worth proportionately less, and every holder's percentage stake is unchanged. A rights issue is an offer to existing holders to subscribe new shares for cash in proportion to their holdings (LR 7.18). An open offer is also made to existing holders, but entitlements are not renounceable, so there are no nil-paid rights to trade (LR 7.23).

Rule (Main Board)	Rights issue requirement
LR 7.19(1)	Need not be underwritten; if underwritten, the underwriter must be a licensed or registered person whose business includes underwriting, or a controlling or substantial shareholder
LR 7.19A	Conditional on minority shareholders' approval if it would increase issued shares or market capitalisation by more than 50% (aggregated over 12 months)
LR 7.20	Made on renounceable provisional letters of allotment; open for at least 10 business days
LR 7.21	Shares not taken up go to excess application forms open to all shareholders, or are placed with independent placees for the benefit of those who did not take up

Two formulas. Ex-bonus price = cum price x old shares / (old + new shares). Theoretical ex-rights price (TERP) = (N x cum-rights price + subscription price) / (N + 1) for a 1-for-N issue, and the theoretical value of one nil-paid right = TERP - subscription price.

Worked example	Figure
1-for-2 bonus issue, cum price HK$45	Ex-bonus price = 45 x 2/3 = HK$30
1-for-3 rights issue at HK$6, cum-rights price HK$10	TERP = (3 x 10 + 6) / 4 = HK$9.00
Value of one nil-paid right	9.00 - 6.00 = HK$3.00

Trap: taking the nil-paid right's value as cum price minus subscription price. The right is worth TERP minus subscription price, because the share price falls to TERP on the ex date.

Takeaway: Bonus issue: no cash, more shares, same stake. Rights issue: cash, renounceable, nil-paid rights trade. Open offer: cash, not renounceable.