AS Redgate Capital (“Company”) has compiled this overview with the aim to inform clients and potential clients about the main risks related to investments and financial instruments, so that the client would be able to make carefully weighed and informed investment decisions. The client should read this overview before making investment decisions and evaluate if and which risk they are able to bear considering their investment experience, goals, financial abilities, and other similar circumstances.
This overview describes the general risks related to financial instruments, but specific financial instruments may have additional terms and conditions and therefore may entail additional risks. Hence, the investor is responsible for independently study and analyse risks arising from investment activities and assess their potential effects and consequences. The investor is independently responsible for making their own investment decisions in a way that they would align with the risk level the investor wishes to achieve.
RISK
Since the investor’s main goal is to earn a profit from their investments, the risk for investor is that the profit is less than expected, or they might end up in a loss. In most cases, higher risk is related to higher reward, but this also means that the risk of loss is also higher. It is important to understand that the prices of financial instruments are volatile depending on the issuer’s financial results, depth of the market, liquidity of the financial instrument, political environment, and other factors, and it is impossible to completely avoid risks. It is possible to mitigate risks if to distribute investments between different issuers and sectors and to select financial instruments based on the investor’s risk tolerance.
RISKS RELATED TO TRADING OUTSIDE THE REGULATED MARKET
A considerable part of the securities which as Redgate Capital manufactures or distributes are traded outside the regulated market (OTC). If investments are made in such securities, the following risks must be primarily considered:
- as such securities are not quoted, it may be more difficult to determine their fair value, conclude transactions with them and obtain information about the issuer;
- the relevant markets are less regulated and do not provide an investor with the same level of protection and information as provided by regulated markets;
- as a rule, instruments traded on such markets have a low level of liquidity and, therefore, it may be difficult to sell them under reasonable conditions prior to redemption.
RISKS RELATED TO KEEPING FINANCIAL INSTRUMENTS ON A NOMINEE ACCOUNT
AS Redgate Capital safekeeps our own assets separately from the assets of clients and in case the Company’s bankruptcy, the clients’ assets will not be included in the bankruptcy estate of the Company. You can read more about the protection and safekeeping of the assets of clients from HERE!
In certain countries or regions in the event of the account manager’s prospective bankruptcy, for the separation of the securities and other assets held in the nominee accounts with him from the securities and other assets belonging to the manager itself. Recourse to external managers runs the risk of the investor losing the securities held in the nominee accounts with this manager in case of the manager’s bankruptcy or the application of coercive measures by government.
Foreign legislation may result in a situation where the account administrator or foreign registrar may have a right of bank clearing over the securities (including securities kept on a nominee account) held abroad through the account administrator, as well as the right to place encumbrances or disposal restrictions on securities; or require them to be placed. Setting these limits may mean that the client cannot exercise their rights arising from their securities in the full extent.
On certain markets, it may be difficult or impossible to participate or vote in the general meeting of shareholders based on securities kept on a nominee account.
MAIN RISKS RELATED TO BOND INVESTMENTS
1) Credit risk. The inability of an issuer to perform the obligations imposed on them by the terms and conditions of the bond, e.g., to make interest and principal payments. Upon materialisation of the credit risk, an investor may partially or fully lose the invested capital and expected revenue.
2) Price and interest rate risk. This is the risk that rising interest rates, a deteriorating general investment climate or a decline in the credit quality of the company will decrease the price of bonds, as investors will find instruments with a similar price and risk level but higher returns on the market. If an investor is forced to sell the bonds prior to the redemption deadline at a price lower than the acquisition cost, the investor will incur a loss. If the investor keeps a bond with a fixed interest rate until redemption, the fluctuations in interest rates do not influence the return on the investment.
3) Liquidity risk. Bond investments entail the risk that the security cannot be sold prior to the redemption deadline, if necessary, as a buyer who would buy the security on acceptable conditions cannot be found. As a rule, the greater the volume of a bond issue and the number of investors who have made an investment, the lower the liquidity risk. The liquidity risk of bonds not traded on the market is generally higher, as the buyer must be found outside the regulated market.
4) Inflation risk. Fixed income bonds do not provide investors with protection against a rise in inflation, and the investor must consider the risk that in the event of a rise in inflation, the investor may incur a loss as a result of the decrease in the real return on investment, i.e. the return adjusted by purchasing power.
5) Early redemption or reinvestment risk. The terms and conditions of some bonds include the possibility that an issuer may redeem the security early. If this happens, the investor loses the revenue that they would have earned if they had been able to keep the bond until redemption. In the event of such bonds, an issuer often has an obligation to pay an additional reward to the investor upon early redemption, which partially compensates for the revenue not earned.
6) Regulatory risk. Due to amendments to legislation, an investor may incur a loss due to an increased tax liability or other adverse amendment to law that may reduce the return on the investment.
7) Currency risk. If an investment is made in bonds quoted in foreign currencies, an investor may incur a loss due to the adverse change in exchange rates.
8) Settlement risk. In certain cases, a bond transaction may also entail the risk that the counterparty does not transfer the sum of money or securities agreed. Such a risk occurs, for example, in the event of a subscription of bonds where the securities transaction is not made in a central register against payment, but the money moves separately via a bank transfer and securities without payment.
9) Security agent/collateral agent risk. In the event of investing in secured bonds, the investor must take into account the risk that the security agent/collateral agent may be unable to properly perform their obligations and organise the transfer and sale of collateral in the best interests of the investor if the issuer becomes insolvent.
10) Depositary risk is the threat of loss of assets kept with the depositary/account manager through insolvency, bankruptcy, negligence or the intentional illegal act of the depositary or any other person organising the safekeeping of the assets.
MAIN RISKS RELATED TO EQUITY INVESTMENTS
1) Price risk. The adverse movements of the market price of equities reduce the value of an investment, and an investor may lose a part of the capital invested. If the company that has issued equities faces bankruptcy, there is a risk that the investor will lose all the capital invested. Equities are generally considered instruments with a higher risk than bonds due to the greater price volatility and the pre-emption right of bond investors to the assets of the company in the event of bankruptcy.
2) Liquidity risk. Equity investments entail the risk that the security cannot be sold, if necessary, as a buyer who would buy the security on acceptable conditions cannot be found. Liquidity risk primarily depends on the activity on the secondary market – if the security has been admitted to trading on the stock exchange, the number of investors is large and frequent transactions are made on the market, exiting the investment is more likely to be successful.
3) Dividend risk. Due to changes in the dividend policy of a company, an investor may lose the revenue expected from dividends. In the case of increased dividend payments or a reduction of share capital, the investor may also bear the reinvestment risk, i.e. the available capital cannot be invested with similar returns and the total return on the capital invested is therefore lower than expected.
4) Currency risk. If an investment is made in equities quoted in foreign currencies, an investor may incur a loss due to the adverse change in exchange rates.
5) Regulatory risk. Due to amendments to legislation, an investor may incur a loss due to an increased tax liability or other adverse amendment to law that may reduce the return on the investment.
6) Settlement risk. In certain cases, an equity transaction may also entail the risk that the counterparty does not transfer the sum of money or securities agreed. Such a risk occurs, for example, in the event of a subscription of equities where the securities transaction is not made in a central register against payment, but the money moves separately via a bank transfer and securities without payment.
7) Depositary risk is the threat of loss of assets kept with the depositary/account manager through insolvency, bankruptcy, negligence or the intentional illegal act of the depositary or any other person organising the safekeeping of the assets.
OTHER RISKS RELATED TO INVESTMENTS AND FINANCIAL INSTRUMENTS
1) Market risk. Market risk is the prospect of incurring a loss due to general price changes in the securities market or unfavourable price changes in a certain sector. Unfavourable price changes may be caused, for instance, by the poor financial performance of a country or sector of the economy, unstable economic environment, unstable securities market and the like.
2) Issuer risk. Issuer risk is the prospect of the value of a security declining due to an issuer’s poor financial indicators, financial difficulties or incapacity to meet its obligations toward investors arising from the securities issued by it. For example, filing for bankruptcy protection implies a rapid reduction in the price of shares issued by the company.
3) Counterparty risk. Although the organizers of marketplaces created for trading with financial instruments (e.g., stock exchange or other regulated market) have generally mitigated this risk with different measures, there is a risk, that the counterparty of the transaction does not fulfil their obligations.
4) Political risk. Political risk is the prospect of events in the country or region where the issuers of securities are active or registered that will affect the political or economic stability or future development of that country. Due to such events, an investor may lose in part or completely its investments in that country and incur a significant loss on the investments made.
5) Systems risk. Systems risk is the prospect of incurring a loss (foremost) due to technical malfunction in the systems of depositories, custodians, stock exchanges and other settlements of securities transactions or communication means, which can result in failure to execute transactions, post-transaction transfers may be late, erroneous transactions, and the like, which may cause damage to the client.
6) Information risk. Information risk is the prospect of an investor not receiving adequate and accurate information about securities or an impediment in receiving such information. For instance, certain corporate events may be reflected in the portfolio in the form of a time reference, an investor may misunderstand the conditions of the take-over bid and miss the exercising of his right to subscribe.
7) Legal risk. Legal risk is the prospect of investment in securities without an overview of the legislative acts in the issuer’s country of operation and the obligations flowing therefrom. Thereby an investor may incur a loss or be subject to sanctions arising from legislation. In addition, legislative acts in the country may be amended (see Political risk), entailing the creation of an unfavourable restriction or obligation for the investor.
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