It is important always to remember that investments can and do rise and fall in value.
This means you should only invest if you are comfortable with the possibility of losses. By its very nature, investing requires you to take some risk in order to have the opportunity to make long-term gains: the main thing is to understand that risk and to only assume a level of risk with which you are absolutely comfortable, including the possibility of losing your investment in its entirety. It is not possible to get rid of risk entirely – even a bank deposit account is exposed to the risk of the bank becoming insolvent, but it can be managed, generally by spreading investments around. This is called diversification and means that, should one of your investments fall, the loss will be less that would have been the case, had you invested everything into that one investment.
You should consider the different types of risk which exist. These include:
» Investment Risk: where the value of your investment can fluctuate up and down;
» Performance Risk: where the value of your investment can be influenced by the investment policies followed by a fund manager;
» Counter-party Risk: where the value of your investment can be affected by the failure of a third party to fulfil its obligations;
» Leverage Risk: where the value of your investment can be affected by borrowing within the investment vehicle you are using;
» Currency Risk: where you are investing in a different currency to that in which your investment is denominated or in which your income is received. Currency fluctuations can either go against you, or in your favour;
» Liquidity Risk: where the value of your investment is affected by the inability of your chosen investment scheme to meet its short-term obligations or where there may not be a buyer for investments that need to be sold;
» Geographical & Political Risk: consideration should be given to the geography and politics in the area in which your chosen investment operates;
» Inflation Risk: where the value of your investment is affected by inflation;
» Issuer Risk: where the value of your investment is exposed to the possibility of insolvency of the issuer;
Types of Investment
Bonds and Corporate Bonds
Bonds are a loan to a national government or a local authority. Corporate bonds are a loan to a company. You may see bonds/corporate bonds referred to as fixed interest, debt securities, Gilts (UK government), T-Bills or loan stock.
Bonds of both types are issued for a set period, sometimes many decades in the future, and usually pay a fixed rate of interest, known as the coupon. When the bond reaches maturity, the capital is repaid. Both types of bond can be traded on the secondary market, usually at a price that is either higher or lower than the face value of the bond. If the price is higher, the bond is said to be trading at a premium, whereas if it is lower, it is said to be trading at a discount.
Government-issued bonds are generally regarded as low risk and tend to offer lower coupons. Corporate bonds are seen as slightly higher risk because there is a risk that the company issuing the bond may not be able to pay the coupon, or perhaps repay the capital at maturity. Because of this, they generally have higher coupons, but are nevertheless regarded as less risky than actually investing in the company’s own shares. When considering a corporate bond, consideration should be given to the company’s credit rating: a high coupon may indicate a low credit rating and vice versa.
Cash deposits such as bank or building society accounts are generally regarded as low risk and a good place to keep funds which may be needed in the short term. Whilst it is not unknown for a bank or building society to collapse, many countries operate investor protection programs which compensate investors up to a certain limit in these circumstances. Such programs and limits vary from country to country, and you should make sure you are aware of how they relate to your own circumstances. Returns on cash deposits are generally very low, and the effect of inflation must always be considered: if inflation is higher than the interest on your cash deposit, the real spending power of your cash will diminish over time (Inflation Risk); additionally, if you hold a cash deposit in a currency other than your own home currency, you should be alert to Currency Risk and the danger that an adverse movement in currency rates could significantly devalue the real spending power of your cash deposit in your home currency.
Commodities such as food, grains & precious metals are subject to the laws of supply and demand. In addition, their value can be affected by factors such as weather and the underlying economy. Because of this, commodities can be risky and volatile.
Derivatives are sophisticated financial instruments such as options and futures. There is a direct link between their features and value, and those of the asset from which they are derived (e.g., bonds, currencies, commodities & equities). They are used by investment professionals and sophisticated investors to manage risk and volatility within a portfolio, and, used properly, can enhance performance.
Equities are financial instruments signifying (part) ownership in a company. You can buy equities directly using a stockbroker, alternatively they can be purchased as part of a pooled investment, such as an investment fund. It is important to understand that the price of a share is influenced to a large degree by how the market sees its current value. Prices are influenced by a company’s periodic reports to its shareholders and can fluctuate quite sharply in either direction if a company either exceeds or fails to meet its stated targets. Investors who choose to hold shares need to be comfortable with short-term volatility; it is generally sensible to maintain a well-diversified portfolio, and to have an investment horizon extending to 5 years and beyond. Some shares will have different rights and some may not be listed. Such unlisted shares are often difficult to dispose of resulting in investors being unable to realise profits/access capital.
Whilst bricks and mortar have traditionally been regarded as a good long-term investment with the possibility of generating both income in the short term and capital growth over the long term, it is important to remember that real estate prices can and do go up and down. In addition, capital invested into real estate is likely to be tied up for a long period and cannot easily be accessed. Other factors to consider are the risk of interest rate rises, repairs, and problematic tenants. Properties in countries other than your own should be assessed from the point of view of both current and possible future legislation in the country you are buying in. This document is intended as a broad overview of the types of risk and investments an investor may encounter. It is not an exhaustive list. If there is anything you are unsure about, we encourage you to make your own enquiries.
Other "Bonds" - including Asset Backed Bonds/Fixed Rate Bonds
These are debt instruments issued by a variety of borrowers for a variety of reasons. The financial strength (and therefore investment risk) of these borrowers often vary as do the specific terms related to the instruments. These tend to be considerably higher risk than other kinds of bonds, sometimes with questionable probability of capital repayment, coupon payment and questionable ability for lenders/investors to access or realise any security even if it is tangible. These types of bonds are often restricted to certain investor types/categories and you should carefully check this.
You should not invest in anything unless you fully understand the risks involved and have taken independent measures to satisfy yourself that the investment you are undertaking is suitable to your own specific circumstances.
1. Definitions in this document shall have the same meaning as the Definitions shown in our Client Terms of Business document as amended from time to time.
2. By signing our Terms of Business and/or taking out an Investment through us, You warrant and confirm to Us that each of the following statements is true:
I have sufficient life insurance provision in place to provide for the needs of my family in the event of my death
I have sufficient income protection planning in place to provide for the needs of myself and my family in the event my income is interrupted for any reason
I have sufficient pension provision in place to provide for the needs of myself and my family in retirement and my family in the event of my death
I have sufficient savings in place to provide for myself and my family for a period of 6 months or more in the event I am unemployed or prevented from working and that such savings are held in an easily accessible account
Any other investments I may hold are sufficiently diversified and that the Investment I have decided to take out will not account for an unduly large proportion of my overall portfolio
Having given the matter detailed consideration, after reviewing all documentation provided, having been given ample opportunity to raise questions and having received satisfactory answers to all such questions, and having conducted my own independent analysis of the investment I am considering, I consider that this Investment is suitable for holding in my own portfolio and I therefore have decided to proceed with the Investment
3. By signing our Terms of Business and/or taking out an Investment through us, You warrant and confirm to Us that You understand that any charges which may apply to the Investment are imposed by the Investment provider and You confirm that We have no control over the said charges, and you agree without reservation to the following statement:
I hereby release Capiteus, its officers and successors from any liability whatsoever for any changes/increases in charges imposed by the Investment provider and I understand and accept that any such changes/increases may affect the overall cost of my Investment
4. By signing our Terms of Business and/or taking out an Investment through us, You warrant and confirm to Us that You have sought independent advice as to the tax treatment of the proposed Investment and in particular the tax treatment of the proposed Investment as it relates to Your own personal circumstances as they are now and as they are likely to be in the future and You agree to the following statement:
I hereby release Capiteus, its officers and successors from any liability whatsoever for any adverse taxation consequences I may incur in any territory or jurisdiction or at any time as a result of taking out the Investment
5. By signing our Terms of Business and/or taking out an Investment through us, You warrant and confirm to us that You have read in full and understood the investment risk warnings as amended from time to time as published on our website and You agree to the following statements:
I have read the investment risk warnings published on the Capiteus website and I have been given ample opportunity to raise questions and having received satisfactory answers to all such questions I have concluded that the proposed Investment is suitable for my own level of risk tolerance
I have made independent analysis of the risks associated with the proposed Investment, and I am entering into the Investment in the knowledge that investments in general can and do fluctuate in value and that there is a possibility I could lose all the money I place into the Investment. I hereby release Capiteus, its officers and successors from any liability whatsoever for any losses I may incur howsoever caused