How the U.S. Stock Market Works: What Hong Kong Investors Need to Know

TL;DR: The U.S. stock market is a vast, highly liquid investment market. This article covers how the U.S. market works, the two major exchanges, the three major indexes, trading hours (Hong Kong time), circuit breakers, key tax considerations, and how to get started—helping you build the essential knowledge you need before entering the market.

In recent years, more and more Hong Kong investors have turned their attention to U.S. stocks. Some focus on the technology sector, while others hope to diversify risk through global asset allocation. The U.S. market offers meaningful breadth and depth. Understanding how the U.S. stock market works is a sensible first step for investors considering entering this market. Starting from the basics, this article helps you systematically grasp the core knowledge of U.S. equities, including exchange structure, the three major indexes, trading rules, tax arrangements, and the main differences from Hong Kong stocks.

The Size and Structure of the U.S. Stock Market

The U.S. stock market has an enormous market capitalization, offering investors from around the world opportunities to participate. To understand how U.S. stocks operate, you first need to know the market’s basic building blocks.

The Two Major Exchanges

The U.S. stock market is dominated by two major exchanges:

New York Stock Exchange (NYSE, New York Stock Exchange) is a long-established, traditional exchange, mainly listing large blue-chip companies. With higher listing requirements, it attracts many leading companies in finance, industrials, and consumer goods.

Nasdaq (NASDAQ, National Association of Securities Dealers Automated Quotations) is a hallmark of fully electronic trading and is known for technology and high-growth companies. Many globally renowned tech firms are listed here.

Both exchanges are regulated by the U.S. Securities and Exchange Commission (SEC, Securities and Exchange Commission). Listed companies must regularly disclose financial reports (including the annual report Form 10-K and the quarterly report Form 10-Q) to ensure market transparency.

Market Participants

Key participants in the U.S. market include individual retail investors, institutional investors (such as funds, insurance companies, and pension funds), liquidity providers, and high-frequency trading firms. Institutional investors manage large pools of capital and often have greater influence on price trends, while retail investors trade through brokerage platforms using their own funds.

The Three Major U.S. Stock Indexes

Investors often use three major indexes to gauge the overall direction of the U.S. market, with each index emphasizing something different.

S&P 500 Index (S&P 500)

The S&P 500 Index (S&P 500) covers 500 large companies listed in the United States and has broad market coverage. It is widely regarded as an important indicator of the overall U.S. economy. Because its constituents span many industries, the S&P 500 is also tracked by numerous index funds (Index Fund) and exchange-traded funds (ETF, Exchange Traded Fund). To learn the differences between index funds and actively managed funds, and how to allocate assets through funds, see Fund Investing Basics: A Comprehensive Guide for Hong Kong Investors.

Nasdaq Composite Index

The Nasdaq Composite Index includes more than 3,000 companies listed on Nasdaq. It is known for having a higher weighting in technology and innovative companies, making it an important reference for tracking the performance of the tech sector.

Dow Jones Industrial Average

The Dow Jones Industrial Average (Dow Jones Industrial Average) consists of 30 large U.S. blue-chip companies and has the longest history among the three. Although it has relatively few constituents, its historical stature still gives it strong symbolic importance in the market.

You can track the latest moves in these three major indexes in real time via Longbridge Market Data.

U.S. Stock Market Hours (Hong Kong Time)

Because of the time difference between the U.S. and Hong Kong, knowing the correct market opening hours is crucial for Hong Kong investors. The U.S. market uses Daylight Saving Time, with two periods each year:

Pre-market and After-hours Trading

In addition to regular trading hours, some platforms offer pre-market (Pre-market) and after-hours (After-hours) trading, allowing investors to continue trading before the official open or after the close. However, liquidity during these sessions is generally lower than during regular hours, and bid–ask spreads may be wider, so investors should pay attention to the associated risks.

Tip: U.S. stocks do not have daily price-limit rules. In theory, prices can fluctuate significantly within a single trading day, so investors should manage risk carefully.

Core U.S. Trading Rules

Being familiar with U.S. trading rules can help you manage your portfolio more effectively.

Flexible Trading Units

Unlike Hong Kong stocks, where the minimum trading unit is a “board lot,” U.S. stocks are generally traded by the share. Investors can buy as little as one share, and some platforms even support trading fractional shares (Fractional Shares), making the entry threshold more flexible.

Settlement System

U.S. stocks use a T+1 settlement cycle, meaning the clearing and settlement of funds and securities are completed on the first business day after the trade. In addition, there are multiple public holidays in the U.S. market, and on some days the market closes early. When planning trades and moving funds, you should pay attention to the relevant calendar. For details, see the U.S. Stock Market Holiday Schedule, Closures, Early Trading, and Essential Strategies for Hong Kong Investors.

Circuit Breakers

The U.S. market has a circuit breaker mechanism (Circuit Breaker). When the overall market experiences sharp volatility, trading may be halted for a period to prevent chain reactions triggered by panic selling. Under U.S. regulatory rules, circuit breakers have three levels, each triggered at specific decline thresholds and imposing trading halts of different durations.

Individual stocks also have volatility halt mechanisms. When a single stock moves sharply up or down within a short period, a temporary trading halt may likewise be triggered.

Day Trading Restrictions

If an investor makes more than three “day trades” within five trading days (i.e., buying and then selling the same stock on the same day), and the account equity is below USD 25,000, the investor will be classified as a “Pattern Day Trader” (Pattern Day Trader) and will be subject to related trading restrictions. This is an especially important rule for new investors.

Tax Considerations for Hong Kong Investors

Taxation is an important area Hong Kong investors must understand before investing in U.S. stocks. Below are two key tax items:

Dividend Withholding Tax

Under U.S. tax law, non-U.S. tax residents (including Hong Kong investors) are subject to a 30% withholding tax on dividends received from U.S.-listed companies. For example, if a company declares a dividend of USD 1.00 per share, the amount actually received will be USD 0.70. This tax is automatically withheld by the broker at the time the dividend is paid, and investors do not need to file separately. Because there is no tax treaty between Hong Kong and the United States, Hong Kong investors generally cannot apply for an exemption or reduction of this 30% rate.

Capital Gains Tax Exemption

This is a tax feature of investing in U.S. stocks for Hong Kong investors: non-U.S. tax residents are generally not required to pay U.S. capital gains tax (Capital Gains Tax) on capital gains earned from trading U.S. stocks (i.e., profits from the difference between the buying and selling prices).

Form W-8BEN

When opening a U.S. stock account, investors typically need to fill out Form W-8BEN to declare their status as a non-U.S. tax resident. The form is valid for three years and must be resubmitted upon expiration. Some brokers arrange for investors to complete this step during the account-opening process.

Tip: If a non-U.S. resident holds U.S. assets (including U.S. stocks) with a total value exceeding USD 60,000, U.S. estate tax may apply. When planning your asset allocation, consider consulting a professional tax adviser.

Key Differences Between U.S. and Hong Kong Stocks

For Hong Kong investors who are used to trading Hong Kong stocks, understanding the differences between the two markets can help you transition more smoothly to U.S. stock trading.

Each market has its own characteristics. Investors can consider how to allocate between the two within their portfolio based on their investment objectives and risk tolerance. You can learn about available tradable product types via the Longbridge Investment Products Overview.

How to Start Investing in U.S. Stocks

After mastering the basics, investors can consider the steps below to begin their U.S. stock investing journey.

Choose the Right Trading Platform

When choosing a platform, consider factors such as whether it holds the relevant regulatory licenses, its trading fee structure, the platform’s trading tools and market data services, and the convenience of deposits and withdrawals. Longbridge Securities holds Hong Kong SFC Type 1, 2, 4, and 9 licenses and offers U.S. stock and ETF trading services.

Longbridge offers multiple trading interfaces, including a mobile app and the Longbridge Pro desktop version, to suit different investors’ usage preferences.

Complete the Account Opening Process

To open a U.S. stock account, you generally need to provide identification (such as a Hong Kong ID card or passport) and proof of address (such as a bank statement or a utility bill). Some platforms support fully online account opening, making the process relatively convenient. During account opening, you will also be guided to complete Form W-8BEN.

Deposit Funds and Start Trading

After opening your account, you can deposit funds via bank transfer and then use the platform’s search and screening features to choose what to invest in. Making good use of stock screening tools can help you filter U.S. stocks based on different criteria.

Tip: Some investors first review the target company’s core business and financial condition, and refer to reliable research reports for analytical insights.

FAQs

Do Hong Kong investors need to file taxes when investing in U.S. stocks?

Hong Kong itself does not levy capital gains tax on overseas investment income, and non-U.S. residents also do not need to pay U.S. tax on capital gains from trading U.S. stocks. Note, however, that dividend income from U.S. stocks is subject to a 30% U.S. withholding tax at the time of payment. Investors do not need to file on their own, but the withholding directly reduces the dividends actually received.

What is the minimum investment amount for U.S. stocks?

U.S. stocks generally have a minimum purchase unit of 1 share. Some platforms also support fractional share trading, allowing investors to invest in high-priced stocks with less capital. Therefore, the theoretical minimum investment amount depends on the share price of the stock you choose.

Can I invest in U.S. stocks and Hong Kong stocks at the same time?

Yes. Many investors choose to hold both Hong Kong and U.S. stocks to achieve geographic diversification. Some platforms provide multi-market integrated services, allowing investors to manage positions across different markets in a single account.

How often does Form W-8BEN need to be updated?

Form W-8BEN is valid for three years. Before it expires, brokers typically remind investors to resubmit it to maintain certification of non-U.S. tax residency. If it is not updated in time, it may affect tax processing arrangements.

Do U.S. stocks have daily price limits?

U.S. stocks do not have single-day price-limit rules, but they do have circuit breakers and single-stock volatility halts. When abnormal volatility occurs, trading may be paused to maintain orderly markets.

Conclusion

The U.S. stock market gives Hong Kong investors opportunities to invest in many representative companies, but it also comes with different tax arrangements and trading rules. However, investing in U.S. stocks also involves practical challenges such as currency fluctuations, market liquidity, and time-zone differences. You need a solid understanding of how the market works to make better-grounded decisions.

Which tools you choose depends on your investment objectives, risk tolerance, market views, and experience level. No matter what you choose, you must fully understand how it works, its risk characteristics, and trading rules, and build a robust risk management plan. You can learn more investment knowledge via Longbridge Academy or Download the Longbridge App.