Introduction
Split-share stocks, also known as corporate-structured securities or Chinese-style red chips, as the name suggests, are a type of indirect equity investment mechanism used to separate a companys security interests into different share classes. They are a unique type of stock issued in the mainland Chinese Stock Market. Split-share stocks often maintain the same performance characteristics of other stocks listed in the same exchange but have an additional risk of time-lag. This type of stock is issued by public companies on the Shanghai and Shenzhen exchanges, and most are listed on the Shanghai Stock Exchange.
Types of Split-share Stocks
There are three types of split-share stocks commonly seen in the Chinese stock market: capital-guaranteed split-stocks, single-style split-stock redemption and capital-guaranteed with bonus split-stock issuance.
C apital-guaranteed split-stocks , also known as A + B shares, guarantee the principal held by investors. The stock shareholders enjoy both capital guarantee as long as the underlying stock is trading at or above a predetermined level, and a participation in any upside from appreciation in the stock .
Single-style split-stock redemptions are a new type of split share stock; the price of this type is generally lower than the market price of the companys underlying stock, but the redemption of these shares is based on the actual market value of the underlying stock.
Capital-guaranteed with bonus split-stock issuance is a type of split-stock in which shareholders are guaranteed a certain amount of security plus a bonus on the predetermined date when the stock is issued.
Advantages of Split-share Stocks
The main benefit of split-share stocks is its ability to encourage diversification. The stockholders will not be exposue to only one company and can diversify their portfolio without selling the underlying stock.
Another advantage of split-share stock is its enhanced access to liquidity through derivatives. Investors can create their own strategies with the help of options and their corresponding contracts, thereby reducing their risk level .
In addition, unlike other stocks, split-share stocks have advantages such as price limits; the lower limit is guaranteed no matter what the stock does, and trade cannot be conducted if the stock surpasses the upper limit.
Finally, the most attractive benefit of split-share stock is its ability to offer a higher dividend rate and potential capital gains.
Disadvantages of Split-share Stocks
The biggest downside of split-share stock is the lack of liquidity and pricing confusion that come with it. The higher available dividends and potential capital gains also come at a cost, namely that the stockholders are exposed to greater risk.
Some split-share stocks can also be subject to additional fees, such as “rebates” on buybacks or upfront fees on purchases.
In addition, most split-share stocks are linked to indices, so the performance of the stock is largely determined by the index and not the individual stock that is being held.
Conclusion
Split-share stocks, while offering attractive benefits, such as higher dividend rates and potential capital gains, are also accompanied by higher risks and hidden fees. While split-share stocks can be an attractive investment opportunity, it is important for investors to understand the potential risks associated with it and to also research deeply before deciding to purchase split-share stocks.
