16.1 General Risk Warning: The past performance of any investment is not necessarily a guide to future performance. The value of investments or income from them may go down as well as up. As stocks and shares are valued from second to second, their bid and offer values fluctuate sometimes widely. The value of shares may rise as well as fall due to, and not just include, the volatility of world markets, interest rates, economic conditions/data, and/or changes in the rate of exchange in the currency in which the investments are denominated. You may not necessarily get back the amount you invested.
16.2 Alternative Investment Market: This is a market designed primarily for emerging or smaller companies. The rules of this market are less demanding than those of the official List of the London Stock Exchange and therefore carry a greater risk than a company with a full listing. With AIM shares there is often a big difference between the buying price and the selling price. If they have to be sold immediately, you may get back much less than you paid for them. The price may change quickly and it may go down as well as up.
16.3 Penny Shares. You run an extra risk of losing money when you buy shares in certain smaller companies including “penny shares”. There is a big difference between the buying price and the selling price of these shares. If you have to sell th
m immediately, you may get back much less than you paid for them. You may have difficulty in selling these shares. The price may change quickly and it may go down as well as up and it may be more difficult to buy and sell shares in the penny share category. You should not invest amounts that you cannot afford to lose.
16.4 NEX Exchange (NEX). The NEX Exchange is authorised as a Prescribed Market and Recognised Investment Exchange under the FSMA 2000. It may be difficult to obtain reliable information about the current trading position of companies on NEX however, and if there is only one market-maker quoting prices, there may be occasions where you may have difficulty in buying or selling shares at a reasonable price or at all. Similarly, the difference between the buying and selling prices can be wide and prices being quoted on NEX may only be indicative prices and not firm two-way prices. Additionally, there may have been little or no trading in the stock since its issue. Consequently, there is a higher level of risk attached to companies trading on NEX and if you have to sell shares in these companies immediately, you may get back much less than you paid for them or be unable to sell them at all.
16.5 Non-readily Realisable Investments. You may have difficulty in selling such investments at a reasonable price. In some circumstances, it may be difficult to sell them at any price. It can be difficult to assess what would be a proper market price for these investments. You should not invest in these unless you have thought carefully about whether you can afford it and whether it is right for you.
The risks associated with Private, Unlisted companies may include, but are not limited to:
· Recently established companies may have difficulty in obtaining market acceptance of their underlying products or services
· There may be little or no market liquidity in the securities and it may be difficult to establish a proper market price for them
· The management teams of such companies may be inexperienced, and the companies could therefore encounter management, financial or operational difficulties which they may not be able
· to address adequately
· Companies may underestimate their capital requirements and may have difficulty in raising additional capital when required.
You should only make investments in non-readily realisable investments using funds that you are not going to need for another purpose in the foreseeable future, as you may be unable to sell such securities at the time of choosing due to a lack of, or little liquidity, in them from time to time.
16.6 Foreign markets will involve different risks to UK markets. In some cases, the risks will be greater. On request, your broker must provide an explanation of the protections that will operate in any relevant foreign markets, including the extent to which he will accept liability for any default of a foreign broker through whom he deals. The potential for profit or loss from transactions on foreign markets will be affected by fluctuations in foreign exchange rates.
16.7 A warrant is a right to subscribe for shares, debentures, loan stock, or government securities, and is exercisable against the original issuer of the securities. Warrants often involve a high degree of gearing, so that a relatively small movement in the price of the underlying security results in a disproportionately large movement in the price of the warrant. The prices of warrants can therefore be volatile. You should not buy a warrant unless you are prepared to sustain a total loss of money you have invested plus any commission or other transaction charges. Some other instruments are also called warrants but are actually options (for example, a right to acquire securities that are exercisable against someone other than the original issuer of the securities, often called a ‘Covered).
16.8 Transactions in off-exchange warrants may involve greater risk than dealing in exchange-traded warrants because there is no exchange market through which to liquidate your position, to assess the value of the warrant or the exposure to risk. Bid and offer prices need not be quoted, and even where they are, they will be established by dealers in these instruments and consequently, it may be difficult to establish what a fair price is. Your broker must make it clear to you if you are entering into an off-exchange transaction and advise you of any risks involved.
16.9 Structured Product Risk Warning: Structured Products are complex financial instruments, that entail considerable risks and, accordingly, are only suitable for investors who have the requisite knowledge and experience and understand thoroughly the risks connected with an investment in these Structured Products and are capable of bearing the economic risks. The products are denominated in GBP, USD, CHF, and EUR. If the investor’s reference currency differs from the aforementioned, the investor bears the risks between GBP, USD, CHF, and EUR and their reference currency.
16.10 Execution Only Risk Warning: We will inform you if you have been classified as an execution-only client. As an execution-only client, you have been informed that investments within the markets chosen are only suitable for experienced investors. Any decisions on investments are purely your own choice and Enigma Strategy will not provide any advice on these investments. We will execute the transactions for you only. You will therefore be responsible for loss with the investments chosen. Please ensure you fully read and understand the risks involved in any decision you make. If you have any doubt whether any investment is suitable for you, you should obtain expert advice.
16.10.1 Markets may be volatile and it may be difficult or impossible to liquidate a position: Under certain trading conditions, it may be difficult or impossible to liquidate a position. This may occur, for example, at times of rapid price movement if the price rises or falls in one trading session to such an extent that trading in the underlying market is suspended or restricted.
16.10.2 Non-Guaranteed Stops do not necessarily cap your loss to the intended amount: Placing Non- Guaranteed Stop Order will not necessarily limit your losses to the intended amounts, because market conditions may make it impossible to execute such an Order if the underlying market moves straight through the stipulated price.
16.10.3 Before you begin to trade, you should obtain details of all commissions and other charges for which you will be liable. If any charges are not expressed in money terms (but, for example, as a percentage of contract value), you should obtain a clear and written explanation, including
16.11 Futures Risk Warning: Transactions in futures involve the obligation to make, or to take delivery of the underlying asset of the contract at a future date, or in some cases to settle your position with cash. They carry a high degree of risk. The “gearing” or “leverage” often obtainable in futures trading means that a small deposit or down payment can lead to large losses as well as gains. It also means that a relatively small market movement can lead to a proportionately much larger movement in the value of your investment, and this can work against you as well as for you Futures transactions have a contingent liability, and you should be aware of the implications of this, in particular the margining requirements, which are set out in the paragraph “Contingent Liability Transactions”.
16.12 Options Risk Warning: There are many different types of options with different characteristics subject to different conditions: Buying Options: Buying options involves less risk than selling options because, if the price of the underlying asset to move against you, you can simply allow the option to lapse. The maximum loss is limited to the premium, plus any commission or other transaction charges. However, if you buy a call option on a futures contract and you later exercise the option, you will acquire the future. This will expose you to the risks described under “Futures” and “Contingent Liability Transactions”
16.13 Writing Options Risk Warning: If you write an option, the risk involved is considerably greater than buying options. You may be liable for margin to maintain your position and a loss may be sustained well in excess of any premium received. By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you, however far the market price has moved away from the exercise price. If you already own the underlying asset that you have contracted to sell (known as “Covered Call Options”) the risk is reduced. If you do not own the underlying asset (known as “Uncovered Call Options”) the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, and then only after securing full details of the applicable conditions and potential risk exposure.
16.14 Traditional Options Risk Warning: A particular type of option called a “Traditional Option” is written by certain London Stock Exchange firms under special exchange rules. These may involve greater risk than other options. Two-way prices are not usually quoted and there is no exchange market on which to close out an open position or to effect an equal and opposite transaction to reverse an open position. It may be difficult to assess its value or for the seller of such an option to manage his exposure to risk. Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation, you may subsequently be called upon to pay a margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated in the same way as a future position.
16.15 Foreign Exchange Risk Warning: Transactions in Foreign Exchange contracts carry a high degree of risk and may not be suitable for all investors. The “gearing” or “leverage” often obtainable in Foreign Exchange trading means that a relatively small market movement can lead to a proportionately much larger movement in the value of your liability. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts. Contingent Liability Transactions:
16.16 Contingent liability transactions Risk Warning, such as CFDs and other financial products traded on margin will require you to make a series of payments against the purchase price, instead of paying the whole purchase price immediately. If you trade in CFDs or other products traded on margin you may sustain a total loss of the margin you deposit to establish or maintain a position. If the market moves against you, you may be called upon to pay substantial additional monies or margin at short notice to maintain the position. If you fail to do so within the time required, your position may be liquidated at a loss and you will be liable for any resulting deficit. Even if a transaction is not margined, it may still carry an obligation to make further payments in certain circumstances over and above any amount paid when you entered the contract. CFD trades will be carried out for you whenever possible on or under the rules of a recognised or designated investment exchange. However, contingent liability transactions entered into by you that are not traded on or under the rules of a recognised or designated investment exchange (such as foreign exchange transactions) may expose you to substantially greater risks. Before you begin to trade, you should obtain details of all commissions and other charges for which you will be liable. If any charges are not expressed in money terms (but, for example, as a percentage of contract value), you should obtain a clear and written explanation, including appropriate examples, to establish what such charges are likely to mean in specific money terms. In the case of futures, when commission is charged as a percentage, it will normally be as a percentage of the total contract value, and not simply as a percentage of your initial payment.
16.17 Risks associated with CFD trading. Trading foreign currencies and other derivatives via CFDs can be a challenging and potentially profitable opportunity for investors. However, before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience, and risk appetite. Most importantly, do not invest money you cannot afford to lose.
There is considerable exposure to risk in any foreign exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency. Investments in foreign exchange speculation may also be susceptible to sharp rises and falls as the relevant market values fluctuate. The leveraged nature of Forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. Not only may investors get back less than they invested, but in the case of higher risk strategies, investors may lose the entirety of their investment. It is for this reason that when speculating in such markets it is advisable to use only risk capital.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
16.18 Electronic Trading Risks. Before you engage in transactions using an electronic system, you should carefully review the rules and regulations of the exchanges offering the system and/or listing the instruments you intend to trade. Online trading has inherent risks due to system response and access times that may vary due to market conditions, system performance, and other factors. You should understand these and additional risks before trading.
16.19 It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
16.20 Non-Mainstream Pooled Investments (NMPI's) are pooled investments or funds, which are characterised by:
Unusual, speculative or complex assets, product structures, investment strategies and/or terms and features. NMPIs are a pooled investment vehicle and are generally regarded as high-risk products that often invest in assets which are typically not traded in established markets and which are therefore difficult to value and may be highly illiquid. The investments are often complex and difficult to understand, and performance information may be unavailable or unreliable. NMPI’s may invest in one or more volatile assets, such as property, emerging market stocks, renewable energy or fine wine, and therefore the risk of an investor losing all or part of their money are much higher than other investment types such as Collective Investment Schemes (CIS).
A NMPI encompasses:
· Units in an Unregulated Collective Investment Scheme (UCIS)
· Units in a Qualified Investor Scheme (QIS)
· Securities issued by special purpose vehicles (SPVs) (other than excluded securities)
· Traded life policy investments (TLPIs), and
· Rights to or interests in investments in any of the above.
NMPIs are unlikely to be suitable for the average or ordinary retail investor; they are more likely to be appropriate for professional or institutional investors and to those retail clients who are sophisticated investors, and have significant investment experience of investing in these types of investments, and understand all the associated risks.
Risks:
· High risk and illiquid.
· A client investing in a NMPI could lose some or all their investment.
· Unlike regulated CIS, NMPI may not be subject to investment and borrowing restrictions aimed at ensuring a prudent spread of risk, therefore the risk of a total or partial loss of capital is much higher. As a result, they are generally considered to be
· a high-risk investment and you should always ensure that you understand the risks before investing.
· You may not be covered by the Financial Ombudsman Service (FOS), should you have a complaint about the fund, or the Financial Services Compensation Scheme (FSCS) should you need to seek compensation.
· Some investments do not have cancellation rights.
16.21 BONDS/SUBORDINATED DEBT
Callable bonds are bonds that can be redeemed by the issuer prior to their maturity. Puttable bonds have an embedded put option: the holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. Perpetual bonds are bonds with no maturity date; therefore, they may be treated as equity, not as debt. Issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal.
An index-linked bond is a bond in which payment of interest income on the principal is related to a specific price index, usually the Consumer Price Index. A mortgage-backed security (MBS) is a derivative type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securities, or packages, the loans together into a security. Subordinated debt is debt which ranks after other debts if a company falls into liquidation or bankruptcy. Because subordinated debts are only repayable after other debts have been paid, they are higher risk for the lender of the money.
16.22 Covered Warrants
A covered warrant is a security issued by a party other than the issuer or originator of the underlying asset which is then listed as a fully tradeable security on the London Stock Exchange. Covered Warrants are geared investments giving the holder the right but not the obligation to buy or sell the underlying asset, at a specified price (known as the “exercise price”) on or before a predetermined date (known as the “expiry date”).
You should not buy an ordinary warrant or covered warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or transaction fees. This is the maximum you can lose and is known in advance. There is no margin call, i.e. further payments to maintain your position. Some of these investments can have an element of gearing, this can magnify potential returns and magnify potential losses. You should not deal in these products unless you understand their nature and the extent of your exposure to risk.
16.23 Exchange Traded Products
Essentially, Exchange Traded Products (ETPs) are open-ended index funds that, like stocks, are listed and traded on exchange. They allow investors to gain exposure to stock markets of different countries and regions as well as different sectors and investment styles. They also cover other asset classes such as fixed income, currencies and commodities. ETPs are the umbrella name covering the entire product range. Exchange Traded Funds (ETFs), Exchange Traded Commodities (ETCs) and Exchange Traded Notes (ETNs) are all Exchange Traded Products. There is no standard industry definition, however, some may refer to ETPs as the umbrella covering ETCs and ETNs and classify ETFs separately.
16.24 Exchange Traded Funds
There are two main approaches to ETF construction, direct replication and synthetic replication and it is important to understand the major differences.
Direct Replication
This method is the more straightforward with the ETF investing directly in every security in the index with an identical weighting. If this is not possible the provider will buy an optimal mix of stocks thus minimizing tracking error and maximising liquidity. In this instance the assets are held separately from the asset manager. It can be too hard to get access to some markets by direct replication as illiquid or obscure indices may not lend themselves to direct replication as it would be very difficult for the ETF provider to buy and sell the underlying holdings.
Synthetic Replication
Generally, these are either swap based or an investment note/ certificate. Swap based methods use investments made into an ETF to purchase a basket of securities. The composition of this basket will be determined by either the swap counterparty or an independent third party. The returns on this basket are then swapped for the return on a specific underlying index. It is important, that the value of the underlying basket closely mirrors the underlying index, or investors will become exposed to a greater risk of capital loss should the counterparty default. Third parties are often used to build the basket as it removes ‘conflicts of interest’ such as ‘over valuation’ and the ‘dumping’ of illiquid assets.
Investment notes or certificates are debt instruments promising to pay investors the return of an index. These structures can carry significant counterparty risk as they may be solely dependent on the issuer meeting the obligation. To reduce this risk these structures may be ‘collateralised’ which involves a separate basket of ‘collateral’ becoming the property of the investor should the debt issuer default. This method has similar conflicts of interest to the swap-based method, which can be mitigated by the appointment of a third-party collateral manager. In this instance it is important to know the value of the collateral versus the underlying index, and the frequency that it is topped up or trimmed.
16.25 ETC and ETNs
(ETCs) and (ETNs) are open-ended securities that trade on regulated exchanges and enable investors to gain exposure to commodities without taking physical delivery. They are like ETFs in that they are traded and settled on exchange, exactly like normal shares. These issues are largely swap based, the underlying basket likely to be comprised of either the physical asset or futures contracts (these require purchase and delivery of an asset). Like ETF’s the same issues of basket composition/collateral management apply. The two broad forms of ETCs are:
16.26 Index tracking
Investors can invest in index tracking ETCs giving exposure to a range of underlying’s. Generally, both types of
ETCs track a total return index, meaning there are three sources of return:
· The change in the futures price – largely affected by changes in the spot commodity price
· The roll – in order not to receive delivery of the underlying commodity, ETCs will sell the expiring futures contract and buy a contract with a later maturity (normally the next expiry due to liquidity). As future is ‘rolled’ into the later month, there is usually a price difference between the two. This can be a significant factor in the disparity in performance of the underlying commodity and the ETC.
· Interest on collateral – since futures are margined instruments, interest is earned on the cash value of the initial investment.
16.27 Other Risks
Effects of Leveraging
Leveraged ETFs/ETPs try to deliver multiples of the performance of an index or benchmark they track. These have the potential to deliver higher returns but also greater losses. Leveraged and inverse ETFs require daily rebasing and during periods of high volatility this may increase the risk of holding these investments over the medium to long term.
Short or Inverse ETFs/ETPs
Inverse products attempt to deliver the performance opposite to the index using derivative instruments. One consequence of daily calculation, however, is that performance over a longer period can differ significantly from the benchmark. This imperfect hedge needs to be accounted for. Also, the more volatile the referenced asset, the greater this risk becomes. Leveraged Inverse ETFs seek to achieve a return that is a multiple of the inverse performance of the underlying index. These come with the potential for higher levels of return but also greater loses.