Margin Financing

Margin Financing

Margin transactions are also called financing transactions. Investors with “margin account” can use their holding securities in the account as collateral to borrow funds from CNF proportionally to buy in stocks. Investors could use leveraged financing to achieve higher returns.

Examples of margin transactions (financing transactions):

As shown above, if an investor has principal of $10,000 and financing amount of $10,000, then he has $20,000 in total. After buying stocks of $20,000, if the stocks rise by 50%, then the total asset will be $30,000. After repaying the financing amount of $10,000, the investor will have net equity of $20,000.

Conversely, if the investor has principal of $10,000 and financing amount of $10,000, total of $20,000. After buying stocks of the same market value, if stocks drop by 30%, the total assets in the account will be $14,000. After repaying the financing amount, there will be $4,000 in the client’s account with loss of $6,000.

"Margin" can multiply the return. However, losses will also be multiplied. Investors who require financing transactions shall have high level of risk tolerance.

Margin Trading Service
Marginable Securities Market: Hong Kong, China and U.S. markets
Eligible Securities For Margin Trading: More than 1000 designated securities can be traded on margin: Hong Kong-listed securities, U.S.-listed securities, and eligible Stock Connect securities
Financing Ratio: 10%-70%
List of Eligible Stocks and Financing Ratio: Hang Seng Index constituent stocks: 30-70%
Red chips or other stocks with large market capitalization and high liquidity: 30-60%
Others: 10-30%
Securities with low market value and low liquidity, GEM, warrants and CBBCs: 0%

CNF reserves the right to determine and adjust the financing ratio according to various situations.For details, please refer to CNF official website.
Margin Ratio (MR) Total collateral value of holding securities / Total financing amount×100
Margin Call: MR<100%: CNF will trigger margin call, and the investors must deposit within the prescribed time limit. CNF will send margin call notice via email. CNF reserves right to execute liquidation if investors fails to cover the margin call.
Forced Liquidation: MR<85%: CNF reserves the right to execute liquidation immediately without further notice. A notification of the liquidation will be sent via email.

In addition, CNF also reserve the right to execute liquidation in response to the market condition or certain stocks’ price movement without prior notice.
Financing Interest Rate: Within the collateral value (Normal Financing Interest Rate): P** +3%
Over the collateral value (Overdraft Penalty Interest): P** +5%

CNF reserves the right of final decision for changing financing interest rate according to various situations.For details, please refer to CNF official website.

* Total collateral value of holding securities = sum ( stock market value* The specified stocks financing ratio)
**P is the prime interest rate of the local Bank, CNF reserves the right to adjust interest rate according to the announcement from the local Bank.

Examples of buying securities through margin account

1. If the client is holding cash
If investors hold cash HK$10,000, and want to buy in stock K.
If the financing ration of K is 60%, investors can buy stock K not more than the total market value of 10,000/(1-0.6)=25,000
If investors want to buy stock K with market value HK$100,000 and credit line is approved, investors can use margin trading with deposit HK$40,000. In other words, investors have principal of HK$40,000 and financing amount of HK$60,000.

2. If the client is holding stocks
If investors hold eligible securities for financing trading with the total market value of HK$100,000, collateral value of HK$40,000, financing ratio of 40% (100,000*40%=40,000)
If investors want to buy in stock K with financing ratio of 60% and credit line is approved, they can buy stock K with total market value of [HK$100,000 (40,000/(1-0.6)]
Investors hold stock K with total market value of HK$200,000, nominal value of HK$100,000 and financing amount of HK$100,000 (100,000*40%)+(100,000*60%)

*The above examples are only for reference based on the principle of financing leverage. The situation will be varied depends on market conditions, stock quality, investors’ background, etc.

Margin Financing Interest Calculation
Interest = investors’ financing amount of the day * (annual interest rate / 365 days )* actual days, minimum amount is HK$0.01
Margin Call, Cover and Liquidation
Assumption: Investors hold stock K of 100,000 shares with market price $20 per share and the margin ratio is 50%, then the total market value is HK$2,000,000, nominal value HK$1,000,000 (=2,000,000*0.5), financing amount HK$1,000,000, MR 100% (=1,000,000/1,000,000*100%).

When price of stock K drops by 15% to $17.00:

Latest market value Latest collateral value(1) Financing amount MR%(2) Margin call(3)
HK$1,700,000 HK$850,000 HK$1,000,000 85% HK$150,000
Calculation:
(1)
1,700,000*0.5=850,000
(2)
850,000 /1,000,000 *100% = 85%
(3)
1,000,000-850,000 = 150,000
CNF will demand the investors for sufficient deposit or security pledge to cover the positions within a prescribed period.

When price of stock K drop by 25% to $15.00:

Latest market value Latest nominal value Financing amount MR% Margin call
HK$1,500,000 HK$750,000 HK$1,000,000 75% HK$250,000

CNF reserves the right to execute liquidation until the MR is above 100%.
Investors with margin account shall be aware of the MR of the account, and maintain the MR above 100%.