RISK FACTORS
RISK WARNING
All investments involve a degree of risk of some kind. This Exhibit describes some of the risks which could be relevant to the services we provide to you and to the investment products we trade with you or on your behalf. We may provide further risk information during the course of our services to you, as appropriate. Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets outside our control. Investments and the income from them may go down as well as up and you may get back less than the amount you invested. Past performance is not a guide to future performance. This Exhibit cannot disclose all the risks associated with the products we make available to you. You should not invest in or deal in any financial product unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that it is suitable for you in the light of your circumstances and financial position. Different investment products have varied levels of exposure to risks and to different combinations of risks. This information is not intended to constitute a comprehensive statement of all the risks to which you might be exposed and there may be others that exist now, or which may arise in the future.
Currency Risk
Investments denominated in a currency other than sterling or ones that undertake transactions on foreign markets, which include the financial markets of developing countries (Emerging Markets – see below), may expose you to greater risks caused by fluctuations in foreign exchange rates. This can adversely affect the value of your return and the value of your investment. Investments in emerging markets are exposed to additional risks, including accelerated inflation, exchange rate fluctuations, adverse repatriation laws and fiscal measures, and macroeconomic and political factors.
Liquidity risk
There may be difficulty in selling an investment caused by a number of factors, including but not limited to insolvency of the investment, adverse stock market conditions, selling restrictions placed on funds by their managers (sometimes referred to as gating, lockups, notice periods or suspension of redemptions). In these circumstances you may not be able to sell such investments in a timely manner and the value of those investments may fall significantly.
Market risk (systematic risk)
Market risk defines the extent to which returns from all investments change in the same way because they have been subject to the same underlying stimulus such as a change in the interest rate outlook or prospective growth path. You cannot manage systematic risk by diversifying your portfolio.
Non-systematic risk
Non-systematic risk defines the extent to which the returns change from one specific asset such as a company (equity) or bond, as the result of new information of news flow. That is, the returns change in response to very specific information about that specific asset, but which has no other implications for other similar assets. This risk can be diversified away.
Credit risk
Credit risk defines the extent to which a recipient of a loan (typically, in an investment context, a company or a government) is likely to repay that loan and/or any interest accruing to it. Whenever an investor buys a bond, he is extending a loan to the issuer of the bond. There are a number of independent agencies that assets credit risk for companies and government entities that issue bonds (debt), and their measure of credit risk is usually referred to as a credit rating.
Suspensions of trading
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 under the rules of the relevant exchange trading is suspended or restricted.
System/Network Congestion Risk Trading on exchanges is in electronic mode, based on satellite/leased line-based communications, combination of technologies and computer systems to place and route orders. Thus, there exists a possibility of communication failure or system problems or slow or delayed response from system or trading halt, or any such other problem/glitch whereby not being able to establish access to the trading system/network, which may be beyond control and may result in delay in processing or not processing buy or sell orders either in part or in full. You are cautioned to note that although these problems may be temporary in nature, but when you have outstanding open positions or unexecuted orders, these represent a risk because of your obligations to settle all executed transactions.
Derivatives Risk- Effect of "Leverage" or "Gearing"
In the derivatives market, the amount of margin is small relative to the value of the derivatives contract so the transactions are 'leveraged' or 'geared'. Derivatives trading, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the margin amount. But transactions in derivatives carry a high degree of risk. You should therefore completely understand the following statements before actually trading in derivatives and also trade with caution while taking into account one's circumstances, financial resources, etc. If the prices move against you, you may lose a part of or whole margin amount in a relatively short period of time. Moreover, the loss may exceed the original margin amount.
Emerging Markets
You should be aware that there may be potential risks posed by volatile political, legal and commercial conditions in emerging markets which may affect the value of or result in the loss of investments. The quality and reliability of official data published by governments and their agencies in emerging markets might not be equivalent to that available in developed markets. In addition, the absence of developed securities markets as well as potentially underdeveloped banking and telecommunications systems in such countries may give rise to greater custody, settlement, clearing and registration risks. Foreign investment in issuers in emerging markets may be restricted – sometimes such restrictions may not be published, and investors may not be readily made aware of them. In such circumstances, there may be restrictions on repatriation of capital or an investment may have to be scaled down to comply with local foreign ownership restrictions.
Equities (Shares)
Equities represent a part ownership in a company. As such, the owner of a share participates in the fortune of the company - for good or ill. If the company does well, the shares are likely to rise in price, but if the company does badly, the share price is likely to fall. Holders of ordinary shares are the last to be paid in the event of a company becoming insolvent. However, ordinary shareholders also have the potential for good returns provided the company does well and is perceived to be continuing to do well. Some shares pay a dividend, either semiannually or quarterly. A dividend is an amount of money, determined by the company’s Board of Directors, which is a distribution of the company’s profits. Established, profitable companies tend to pay dividends and have a good record of providing a steady stream of dividend payments. Periods of economic difficulty may, however, interrupt such dividend payment for even the most established equities. Younger, less established companies that are building a business tend to retain their profits for re-investment. These are called “growth” companies as their business strategy is to grow their business rapidly. Shares are available in companies of different sizes, industrial sectors, geographical locations, and on different stock markets. Liquidity is an important risk factor when investing in individual equities and is generally driven by the market capitalisation (total value of issued shares) of the company and current market conditions. Liquidity levels can change rapidly, and lack of liquidity often restricts trading in equities with smaller market capitalisations (known as mid cap and small cap). Different time zones also mean that you will not always be able to get a real time price for overseas stocks during the foreign and mauritian trading day. Whether investing directly in overseas markets or through collective investment schemes, currency fluctuations need to be taken into account. A gain or loss made on the performance of a stock can easily be offset by a movement in the currency exchange rate. Alternatively, a gain or loss on a stock could be compounded to make an even larger one. Shares are usually perceived to represent greater risk than bonds. The price of individual shares can fluctuate considerably and can appreciate or decline rapidly. Shares can also remain in decline over long time periods. Share prices rise and fall according to the health of the company and general economic and market conditions. Individual share price rises, and falls can be significant. Stock market investments tend to be more volatile than investments in most bonds. Shares purchased on the Alternative Investment Market (AIM) (especially those known as ‘penny shares’) carry a higher degree of risk of losing money than other UK shares. This is because the requirements on companies that are listed on AIM are less stringent than those for companies with a full market listing. There is also usually a wider spread between the buying price and the selling price of these shares and if they have to be sold immediately, you may get back less than you paid for them due to a lack of liquidity. The price of these shares may change quickly, and they may go down as well as up. It may also be difficult to obtain reliable information about their value or the extent of the risks to which they are exposed.
Collective Investment Schemes (commonly known as ‘funds’)
A fund is a term that covers different types of structure, normally Collective Investment Schemes, Open Ended Investment Companies or Unit Trusts. Funds are arrangements that enable a number of investors to 'pool' their money, in order to gain access to professional fund managers. Investments held by these funds may typically include gilts, bonds and quoted equities, but depending on the type of scheme, may hold higher risk instruments such as property, derivatives, unquoted securities and other complex products. The value of a fund, and the income derived from it, can decrease as well as increase and you may not necessarily get back the amount you originally invested. In addition, funds bear investment management risks, insolvency risks and possibly liquidity risks. You should ensure that you understand the nature of any fund before you invest in it.
Investment trusts
Investment trusts are similar to funds in that they provide a means of pooling your money, but they are publicly listed companies whose shares are traded on Overseas Stock Exchange. The price of their shares will fluctuate according to investor demand and changes in the value of their underlying assets. They will be subject to a combination of the risks associated with shares, bonds and funds in which they are invested. The value of investment trusts, or the income derived from them, can decrease as well as increase and you may not necessarily get back the amount you invested/
Exchange Traded Funds (ETFs)
ETFs are investment funds, traded like shares which hold assets such as shares, commodities or bonds. They normally closely track the performance of a financial index, and as such, their value can go down as well as up and you may get back less than you originally invested. Some ETFs rely on complex investment techniques, or hold riskier underlying assets, to achieve their objectives and therefore you should always ensure you read the documentation provided to ensure you fully understand before you invest the risks you are taking on.
Warrants
A warrant is a time-limited right to subscribe for shares, debentures, loan stock or government securities and is exercisable against the original issuer of the underlying 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, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile. It is essential for anyone who is considering purchasing warrants to understand that the right to subscribe which a warrant confers is invariably limited in time with the consequence that if the investor fails to exercise this right within the predetermined time scale then the investment becomes worthless. You should consider carefully whether warrants are suitable for you in the light of your circumstances and financial position. You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other charges. Some other instruments are also called warrants but are actually options (for example, a right to acquire securities which is exercisable against someone other than the original issuer of the securities, often called a 'covered warrant').
Structured Products
Structured Products are products structured to fulfil a particular trading or market objective. A structured product may combine the features of two or more financial instruments (for example a bond and a derivative). Derivatives often constitute an integral part of a structured product. The product may involve an element of leverage and so a relatively small movement in the value of the relevant underlying asset or index may have a significant effect on the value of the structured product. Structured products are generally not traded on regulated markets and you take the risk on the counterparty issuing the structure. There is typically no recognised market for these investments and it may, therefore, be difficult for you to deal in the investment or to obtain reliable information about its value or the extent of the risks to which it is exposed. Some structured products include an element of capital protection – however, you should bear in mind that this is not a guarantee that the amount invested will be returned in all circumstances. The capital protection offered is typically subject to the investment being held until maturity and to the creditworthiness of the issuer. Structured products are often high-risk investments and you could lose some or all of the money that you have invested in them.
RISK FACTORS - in the case of investments made in derivatives instruments such as options
Risk of Option holders
An option holder runs the risk of losing the entire amount paid for the option in a relatively short period of time. This risk reflects the nature of an option as a wasting asset that becomes worthless when it expires. An option holder who neither sells his option in the secondary market nor exercises it prior to its expiration will necessarily lose his entire investment in the option. If the price of the underlying does not change in the anticipated direction before the option expires, to an extent sufficient to cover the cost of the option, the investor may lose all or a significant part of his investment in the option.
The Exchanges may impose exercise restrictions and have absolute authority to restrict the exercise of options at certain times in specified circumstances.
Risks of Option Writers
If the price movement of the underlying is not in the anticipated direction, the option writer runs the risks of losing substantial amount.
The risk of being an option writer may be reduced by the purchase of other options on the same underlying interest and thereby assuming a spread position or by acquiring other types of hedging positions in the options markets or other markets. However, even where the writer has assumed a spread or other hedging position, the risks may still be significant. A spread position is not necessarily less risky than a simple 'long' or 'short' position.
Transactions that involve buying and writing multiple options in combination or buying or writing options in combination with buying or selling short the underlying interests, present additional risks to investors. Combination transactions, such as option spreads, are more complex than buying or writing a single option. And it should be further noted that, as in any area of investing, a complexity not well understood is, in itself, a risk factor. While this is not to suggest that combination strategies should not be considered, it is advisable, as is the case with all investments in options, to consult with someone who is experienced and knowledgeable with respect to the risks and potential rewards of combination transactions under various market circumstances.
All investments involve a degree of risk of some kind. This Exhibit describes some of the risks which could be relevant to the services we provide to you and to the investment products we trade with you or on your behalf. We may provide further risk information during the course of our services to you, as appropriate. Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets outside our control. Investments and the income from them may go down as well as up and you may get back less than the amount you invested. Past performance is not a guide to future performance. This Exhibit cannot disclose all the risks associated with the products we make available to you. You should not invest in or deal in any financial product unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that it is suitable for you in the light of your circumstances and financial position. Different investment products have varied levels of exposure to risks and to different combinations of risks. This information is not intended to constitute a comprehensive statement of all the risks to which you might be exposed and there may be others that exist now, or which may arise in the future.
Currency Risk
Investments denominated in a currency other than sterling or ones that undertake transactions on foreign markets, which include the financial markets of developing countries (Emerging Markets – see below), may expose you to greater risks caused by fluctuations in foreign exchange rates. This can adversely affect the value of your return and the value of your investment. Investments in emerging markets are exposed to additional risks, including accelerated inflation, exchange rate fluctuations, adverse repatriation laws and fiscal measures, and macroeconomic and political factors.
Liquidity risk
There may be difficulty in selling an investment caused by a number of factors, including but not limited to insolvency of the investment, adverse stock market conditions, selling restrictions placed on funds by their managers (sometimes referred to as gating, lockups, notice periods or suspension of redemptions). In these circumstances you may not be able to sell such investments in a timely manner and the value of those investments may fall significantly.
Market risk (systematic risk)
Market risk defines the extent to which returns from all investments change in the same way because they have been subject to the same underlying stimulus such as a change in the interest rate outlook or prospective growth path. You cannot manage systematic risk by diversifying your portfolio.
Non-systematic risk
Non-systematic risk defines the extent to which the returns change from one specific asset such as a company (equity) or bond, as the result of new information of news flow. That is, the returns change in response to very specific information about that specific asset, but which has no other implications for other similar assets. This risk can be diversified away.
Credit risk
Credit risk defines the extent to which a recipient of a loan (typically, in an investment context, a company or a government) is likely to repay that loan and/or any interest accruing to it. Whenever an investor buys a bond, he is extending a loan to the issuer of the bond. There are a number of independent agencies that assets credit risk for companies and government entities that issue bonds (debt), and their measure of credit risk is usually referred to as a credit rating.
Suspensions of trading
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 under the rules of the relevant exchange trading is suspended or restricted.
System/Network Congestion Risk Trading on exchanges is in electronic mode, based on satellite/leased line-based communications, combination of technologies and computer systems to place and route orders. Thus, there exists a possibility of communication failure or system problems or slow or delayed response from system or trading halt, or any such other problem/glitch whereby not being able to establish access to the trading system/network, which may be beyond control and may result in delay in processing or not processing buy or sell orders either in part or in full. You are cautioned to note that although these problems may be temporary in nature, but when you have outstanding open positions or unexecuted orders, these represent a risk because of your obligations to settle all executed transactions.
Derivatives Risk- Effect of "Leverage" or "Gearing"
In the derivatives market, the amount of margin is small relative to the value of the derivatives contract so the transactions are 'leveraged' or 'geared'. Derivatives trading, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the margin amount. But transactions in derivatives carry a high degree of risk. You should therefore completely understand the following statements before actually trading in derivatives and also trade with caution while taking into account one's circumstances, financial resources, etc. If the prices move against you, you may lose a part of or whole margin amount in a relatively short period of time. Moreover, the loss may exceed the original margin amount.
Emerging Markets
You should be aware that there may be potential risks posed by volatile political, legal and commercial conditions in emerging markets which may affect the value of or result in the loss of investments. The quality and reliability of official data published by governments and their agencies in emerging markets might not be equivalent to that available in developed markets. In addition, the absence of developed securities markets as well as potentially underdeveloped banking and telecommunications systems in such countries may give rise to greater custody, settlement, clearing and registration risks. Foreign investment in issuers in emerging markets may be restricted – sometimes such restrictions may not be published, and investors may not be readily made aware of them. In such circumstances, there may be restrictions on repatriation of capital or an investment may have to be scaled down to comply with local foreign ownership restrictions.
Equities (Shares)
Equities represent a part ownership in a company. As such, the owner of a share participates in the fortune of the company - for good or ill. If the company does well, the shares are likely to rise in price, but if the company does badly, the share price is likely to fall. Holders of ordinary shares are the last to be paid in the event of a company becoming insolvent. However, ordinary shareholders also have the potential for good returns provided the company does well and is perceived to be continuing to do well. Some shares pay a dividend, either semiannually or quarterly. A dividend is an amount of money, determined by the company’s Board of Directors, which is a distribution of the company’s profits. Established, profitable companies tend to pay dividends and have a good record of providing a steady stream of dividend payments. Periods of economic difficulty may, however, interrupt such dividend payment for even the most established equities. Younger, less established companies that are building a business tend to retain their profits for re-investment. These are called “growth” companies as their business strategy is to grow their business rapidly. Shares are available in companies of different sizes, industrial sectors, geographical locations, and on different stock markets. Liquidity is an important risk factor when investing in individual equities and is generally driven by the market capitalisation (total value of issued shares) of the company and current market conditions. Liquidity levels can change rapidly, and lack of liquidity often restricts trading in equities with smaller market capitalisations (known as mid cap and small cap). Different time zones also mean that you will not always be able to get a real time price for overseas stocks during the foreign and mauritian trading day. Whether investing directly in overseas markets or through collective investment schemes, currency fluctuations need to be taken into account. A gain or loss made on the performance of a stock can easily be offset by a movement in the currency exchange rate. Alternatively, a gain or loss on a stock could be compounded to make an even larger one. Shares are usually perceived to represent greater risk than bonds. The price of individual shares can fluctuate considerably and can appreciate or decline rapidly. Shares can also remain in decline over long time periods. Share prices rise and fall according to the health of the company and general economic and market conditions. Individual share price rises, and falls can be significant. Stock market investments tend to be more volatile than investments in most bonds. Shares purchased on the Alternative Investment Market (AIM) (especially those known as ‘penny shares’) carry a higher degree of risk of losing money than other UK shares. This is because the requirements on companies that are listed on AIM are less stringent than those for companies with a full market listing. There is also usually a wider spread between the buying price and the selling price of these shares and if they have to be sold immediately, you may get back less than you paid for them due to a lack of liquidity. The price of these shares may change quickly, and they may go down as well as up. It may also be difficult to obtain reliable information about their value or the extent of the risks to which they are exposed.
Collective Investment Schemes (commonly known as ‘funds’)
A fund is a term that covers different types of structure, normally Collective Investment Schemes, Open Ended Investment Companies or Unit Trusts. Funds are arrangements that enable a number of investors to 'pool' their money, in order to gain access to professional fund managers. Investments held by these funds may typically include gilts, bonds and quoted equities, but depending on the type of scheme, may hold higher risk instruments such as property, derivatives, unquoted securities and other complex products. The value of a fund, and the income derived from it, can decrease as well as increase and you may not necessarily get back the amount you originally invested. In addition, funds bear investment management risks, insolvency risks and possibly liquidity risks. You should ensure that you understand the nature of any fund before you invest in it.
Investment trusts
Investment trusts are similar to funds in that they provide a means of pooling your money, but they are publicly listed companies whose shares are traded on Overseas Stock Exchange. The price of their shares will fluctuate according to investor demand and changes in the value of their underlying assets. They will be subject to a combination of the risks associated with shares, bonds and funds in which they are invested. The value of investment trusts, or the income derived from them, can decrease as well as increase and you may not necessarily get back the amount you invested/
Exchange Traded Funds (ETFs)
ETFs are investment funds, traded like shares which hold assets such as shares, commodities or bonds. They normally closely track the performance of a financial index, and as such, their value can go down as well as up and you may get back less than you originally invested. Some ETFs rely on complex investment techniques, or hold riskier underlying assets, to achieve their objectives and therefore you should always ensure you read the documentation provided to ensure you fully understand before you invest the risks you are taking on.
Warrants
A warrant is a time-limited right to subscribe for shares, debentures, loan stock or government securities and is exercisable against the original issuer of the underlying 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, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile. It is essential for anyone who is considering purchasing warrants to understand that the right to subscribe which a warrant confers is invariably limited in time with the consequence that if the investor fails to exercise this right within the predetermined time scale then the investment becomes worthless. You should consider carefully whether warrants are suitable for you in the light of your circumstances and financial position. You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other charges. Some other instruments are also called warrants but are actually options (for example, a right to acquire securities which is exercisable against someone other than the original issuer of the securities, often called a 'covered warrant').
Structured Products
Structured Products are products structured to fulfil a particular trading or market objective. A structured product may combine the features of two or more financial instruments (for example a bond and a derivative). Derivatives often constitute an integral part of a structured product. The product may involve an element of leverage and so a relatively small movement in the value of the relevant underlying asset or index may have a significant effect on the value of the structured product. Structured products are generally not traded on regulated markets and you take the risk on the counterparty issuing the structure. There is typically no recognised market for these investments and it may, therefore, be difficult for you to deal in the investment or to obtain reliable information about its value or the extent of the risks to which it is exposed. Some structured products include an element of capital protection – however, you should bear in mind that this is not a guarantee that the amount invested will be returned in all circumstances. The capital protection offered is typically subject to the investment being held until maturity and to the creditworthiness of the issuer. Structured products are often high-risk investments and you could lose some or all of the money that you have invested in them.
RISK FACTORS - in the case of investments made in derivatives instruments such as options
Risk of Option holders
An option holder runs the risk of losing the entire amount paid for the option in a relatively short period of time. This risk reflects the nature of an option as a wasting asset that becomes worthless when it expires. An option holder who neither sells his option in the secondary market nor exercises it prior to its expiration will necessarily lose his entire investment in the option. If the price of the underlying does not change in the anticipated direction before the option expires, to an extent sufficient to cover the cost of the option, the investor may lose all or a significant part of his investment in the option.
The Exchanges may impose exercise restrictions and have absolute authority to restrict the exercise of options at certain times in specified circumstances.
Risks of Option Writers
If the price movement of the underlying is not in the anticipated direction, the option writer runs the risks of losing substantial amount.
The risk of being an option writer may be reduced by the purchase of other options on the same underlying interest and thereby assuming a spread position or by acquiring other types of hedging positions in the options markets or other markets. However, even where the writer has assumed a spread or other hedging position, the risks may still be significant. A spread position is not necessarily less risky than a simple 'long' or 'short' position.
Transactions that involve buying and writing multiple options in combination or buying or writing options in combination with buying or selling short the underlying interests, present additional risks to investors. Combination transactions, such as option spreads, are more complex than buying or writing a single option. And it should be further noted that, as in any area of investing, a complexity not well understood is, in itself, a risk factor. While this is not to suggest that combination strategies should not be considered, it is advisable, as is the case with all investments in options, to consult with someone who is experienced and knowledgeable with respect to the risks and potential rewards of combination transactions under various market circumstances.
