This Statement is provided by Agora-Direct Ltd (registered in England with number 09349168) whose registered office is at 5 Prospective Place, Millennium Way, Pride Park, Derby, DE24 8MG and which is authorised and regulated by the Financial Conduct Authority (FCA) (FCA Register number 706273).
This Statement intended to:
1 Make you aware of and disclose to you the risks associated with investment activity generally;
2 Make you aware of and disclose to you the nature and risk of certain investment types and day trading and the potential for risk and loss that will arise in respect of trading on the financial markets to inform your decision-making in terms of whether to open an account and the type of trading to undertake if you do open an account; and
3 Explain to you how your money and assets are protected.
4 Notes on this Statement
This Statement cannot disclose all the risks and other significant aspects of different investment types or trading strategies. Before undertaking any trading you must familiarise yourself with the investment types that you propose to trade and the way in which the market operates. Please ensure that you read all the information on our Website that is relevant to the trading that you propose to undertake with us. You should not deal in these products unless you understand their nature and the extent of your exposure to risk.
The information in this Statement and on our website is not advice, it is provided solely to enable you to make your own investment decisions. The investments and/or investment services referred to may not be suitable for all investors. If you are unsure of the suitability of any investment, you must seek independent advice before taking any action.
If, after reading this Statement, you remain unclear about the risks associated with the different investment types and trading strategies, or you have any other questions as to whether opening an account with us will by appropriate for you, you must seek independent advice before applying to open an account with us.
5 General investment risks
The following are risks that arise commonally in investment activity generally, they are not specific to any particular type of investment or investment strategy:
5.1 Capital at risk
5.1.1 Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at any time. You may not get back the full amount of capital you invested.
5.1.2 The potential gains and losses that may arise from your investments will depend on your appetite for risk and how you manage your approach to risk. Placing all your money into one type of investment can be a high risk strategy. The value of your investment could increase significantly, but it could drop significantly too; there is a risk that you may lose the entire principal amount invested. A managed approach to risk may be to diversify your investments across different companies’ shares and different asset classes.
5.2 Past performance
5.2.1 Past performance should not be seen as an indication or any guarantee of future performance.
5.3 Market Risks
5.3.1 It is important that you understand that trading financial instruments on different markets has its own inherent risk. Some of such risks include:
5.3.2 Systemic risk: This is the risk of disruption to the financial system triggered by an event such as global or regional economic downturn or institutional failure that causes chain reactions resulting in price volatility, loss of investor confidence, significant losses and/or market failure. Such disruption can be unpredictable and difficult to mitigate against.
5.3.3 Volatility: Movements in the price of financial instruments can be volatile and unpredictable. 'Gapping' (a sudden shift in the price of an instrument up or down from one level to next, without trading at the prices in between) can occur and result in a significant loss.
5.3.4 Liquidity: Market conditions can change significantly in a very short time and this will impact the price, spreads and sizes at which your order is executed.
5.3.5 Currency and foreign markets: If you transact in an instrument denominated in a currency other than your account currency, you will be subjected to currency fluctuation which may ultimately impact the profit and loss of the transaction.
Foreign markets will involve different risks from UK markets and in some cases the risks will be greater. There may be different settlement, legal and regulatory requirements from those applying in the UK. The potential for profit or loss from transactions on foreign-denominated contracts will be affected by fluctuations in foreign-exchange rates.
5.4 Insolvency/Counterparty risk
5.4.1 The insolvency or financial default of the account holding broker, or other parties (“counterparties”) involved with your transaction, may lead to positions being liquidated or closed out without your consent. In certain circumstances, you may not get back the actual assets which you lodged as collateral and you may have to accept any available payments in cash.
5.5 Non-readily realisable investments
5.5.1 Non-readily realisable investments are investments in which the market is limited or could become so. You may have difficulty selling this type of investment at a reasonable price and, in some circumstances, it may be difficult to sell it at any price. Do not invest in such investments unless you have carefully thought about whether you can afford to have capital potentially tied up in this way and whether such investments are right for you.
5.6 Suspensions of trading
5.6.1 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. Placing a stop-loss order will not necessarily limit your losses to the intended amounts, because market conditions may make it impossible to execute such an order at the stipulated price.
5.7 Internet Trading Risks
5.7.1 There are risks associated with trading on an electronic internet-based deal execution trading system. If you undertake transactions electronically over the internet you will be exposed to risks associated with internet trading including, but not limited to, the failure of hardware, software and internet connection. The result of any system failure may mean that your order is either not executed according to your instructions or is not executed at all.
5.8 Effect of "Leverage" or "Gearing"
5.8.1 In relation to listed securities where gearing is involved, the gearing strategy used by the issuer may result in movements in the price of the securities being more volatile than the movements in the price of the underlying investments. Your investment may be subject to sudden and large falls in value and you may get back nothing at all if there is a sufficiently large fall in your investment.
5.8.2 When trading in derivative products, the amount of initial margin required to open a position may be small, relative to the value of the derivative contract, this in effect will mean that you are trading using "leverage" or "gearing".
5.8.3 The effect of using leverage or gearing will mean that a relatively small market movement may have a proportionately larger impact on the funds you have deposited or will have to deposit in order to continue to maintain your position(s). This may work against you as well as for you and you may sustain a total loss of any funds used to cover any initial margin requirement as well as any additional funds deposited to maintain your position(s).
5.8.4 If the market moves against your position and/or margin requirements are increased, you may be called upon to deposit additional funds at short notice to maintain your position. It is important to note that it is your responsibility to ensure that you continuously monitor your account at all times, as the failure to maintain sufficient funds or collateral on your account may result in the account holding broker closing all your open margined position(s) and you will be liable for any resulting loss or deficit on the account.
5.9 Securities subject to stabilisation
5.9.1 We, may from time to time execute transactions on your behalf on your express order or you may execute transactions in securities directly through the account holding broker’s trading platform where the price of the securities may have been influenced by measures take n to stabilise it.
5.9.2 You should read the explanation below carefully. This is designed to help you judge whether you wish your funds to be invested at all in such securities. Where we are executing a transaction on your behalf we will make you aware if the securities are subject to stabilisation:
5.9.3 What is stabilisation?
(a) Stabilisation enables the market price of a security to be maintained artificially during the pe riod when a new issue of securities is sold to the public. Stabilisation may affect not only the price of the new issue but also the price of other securities relating to it (such as derivative products). In the UK the FCA allows stabilisation in order to help counter the fact that, when a new issue comes onto the market for the first time, the price can sometimes drop for a time before buyers are found.
(b) Stabilisation is carried out by a ‘stabilising manager’ (normally the firm chiefly responsible for bringing a new issue to market). As long as the stabilising manager follows a strict set of rules, he is entitled to buy back securities that were previously sold to investors or allotted to institutions, which have decided not to keep them. The effect of this may be to keep the price at a higher level than it would otherwise be during the period of stabilisation.
5.9.4 The stabilisation rules:
(a) Limit the period when a stabilising manager may stabilise a new issue;
(b) Fix the price at which the stabilising manager may stabilise (in the case of shares and warrants bu t not bonds); and
(c) Require the stabilising manager to disclose that he may be stabilising but not that he is actually doing so.
5.9.5 The fact that a new issue or a related security is being stabilised should not be taken as any indication of the level of interest from investors , or of the price at which they are prepared to buy the securities.
5.10 Transaction costs
5.10.1 Transaction costs will reduce the returns you see on investments as stated investment prices (e.g. stock exchange pricing) will not build in the costs you will incur as a private investor.
5.10.2 The effect of transaction costs on investment returns will be amplified where a high number of transactions are carried out.
5.10.3 There is naturally a conflict of interest between financial services providers who charge commission on transactions and the investors who are carrying out transactions as it is in the interests of the providers for more transactions to be carried out. You should be aware that this is true for us as much as it is for other financial service providers.
6 Risks associated with specific investment types
6.1 Securitised derivatives
6.1.1 Securitised derivatives may give you a time-limited right or an absolute right to acquire or sell one or more types of investment, which is normally exercisable against someone other than the issuer of that investment. Or they may give you rights under a contract for difference, which allows for speculation on fluctuations in the value of the property of any description or an index, such as the FTSE 100 index. In both cases, the investment or property may be referred to as the "underlying instrument".
6.1.2 Securitised derivatives often involve a high degree of gearing or leverage, so that a relatively small movement in the price of the underlying investment results in a much larger movement, unfavourable or favourable, in the price of the instrument. The price of these instruments can therefore be volatile.
6.1.3 Securitised derivatives have a limited life, and may (unless there is some form of guaranteed return to the amount you are investing in the product) expire worthless if the underlying instrument does not perform as expected.
6.1.4 You should only buy this product if you are prepared to sustain and your financial position can absorb a total or substantial loss of the capital you have invested plus any commission or other transaction charges.
6.1.5 You should consider carefully whether or not this product is suitable for you in light of your circumstances and financial position, and, if you are in any doubt, please seek independent advice.
6.2.1 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 the 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 al so means that a relatively small 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 margin requirements, which are discussed in section 3.5 below (“contingent liability investment risk”).
6.3.1 There are many different types of options with different characteristics subject to the following conditions:
6.3.2 Buying options: This involves less risk than writing (selling) options because, if the price of the underlying asset moves 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 applicable to futures (set out in section 3.2.1 above) and the risks detailed in section 3.5 below (“contingent liability investment risk”).
6.3.3 Writing (selling) options: 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 the 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 which you have contracted to sell (when the options will be known as “covered call options”) the risk is reduced.
If you do not own the underlying asset (“uncovered call options”) the risk can be unlimited. Only experienced investors should contemplate writing uncovered options, and then only after securing full details of the applicable conditions and potential risk exposure.
6.3.4 Traditional options: Certain London Stock Exchange member firms under special exchange rules write a particular type of option called a “traditional option”. These may involve greater risk than other option s. 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.
6.3.5 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 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 futures position.
6.4 Contracts for difference
6.4.1 Futures and options contracts can also be referred to as contracts for difference. These can be options and futures on the FTSE 100 index or any other index, as well as currency and interest rate swaps. However, unlike other futures and options, these contracts can only be settled in cash. Investing in a contract for difference carries the same risks as investing in a future or an option.
6.5 Contingent liability investment risk
6.5.1 Certain “contingent liability investment transactions“, such as trading in futures, CFDs etc., which are margined, require you to make a series of payments against the purchase price, instead of paying the whole purchase price immediately.
6.5.2 If you trade in futures, contracts for difference or write options, 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 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 responsible for the resulting deficit.
6.5.3 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.
6.6 Second-line stocks (e.g. penny stocks, AIM-listed stocks)
6.6.1 Generally these stocks relate to newer companies that do not have any history. The issuer risk is therefore higher as it is difficult to determine how successful a stock has been in the past.
6.6.2 Second-line stocks face restricted trading capacity, i.e. the market liquidity of second-line stocks is often so low that it is impossible to sell shares or only very difficult to do so.
6.6.3 Prices for second-line stocks are often only set based on bidding and asking. The spread between the purchase price (the so-called bid or bid price) and the sale price (the so-called ask or ask price) is often very high with these securities and is arbitrarily set by the so-called market makers. The spread represents an automatic loss. No fair price formation is guaranteed.
6.6.4 Second-line stocks face the risk of abuse/manipulation. The over-the-counter-markets (OTC/Pink sheet/Stuttgart etc.) have one thing in common: the price formation is strongly dependent on just a few participants. This situation provides an opportunity and increases the probability that prices will be manipulated to the detriment of investors.
6.6.5 There can often be a lack of information aor a monopoly on information as second-line stocks are often unknown and are rarely considered in the stock exchange press. It is often extremely difficult to assess the share and obtain information. Investors are largely dependent on the company itself to provide information.
6.6.6 Second-line stocks will often see high market price fluctuations and sudden slumps in prices.
6.7 Exchange Traded Funds (ETFs)
6.7.1 Risks in the development of the secondary market: Permanent listing of an ETF on a stock exchange is not guaranteed.
6.7.2 Investment goal risk: There can be no guarantees that the investment goal, for instance, tracking of a particular index, will be achieved. Firstly, management fees may cost a few base points and can therefore have a negative effect on the market price of the ETF. Secondly, providers might adopt different methods for tracking an index might be adopted, such as sampling of performance, which can give rise to variations in an ETF's performance as against the performance of the index as a whole.
6.7.3 Index risk: Index risk consists of two components:
(a) There are no guarantees that the mapped indices will be computed in the same way in future too; and
(b) The pooling of the index may pose a risk too. This could concern the selection of individual securities and the weighting of some sectors. On some indices, the companies involved are weighted according to market capitalisation; on others, the weighting is the same. The former is risky because of pro-cyclic behaviour by the index fund. Before a security is accepted into an index, it must have achieved a certain level of market capitalisation, which is a consequence of a company’s successful work. Success can therefore only be assessed when looking to the past and it is possible that the share’s high price will soon come to an end.
6.7.4 Correlation with sector ETFs: All the companies in a sector ETF are active in the same sector at the time when they are accepted. The share prices of these companies may therefore be more highly correlated than those of companies, which are selected according to a different investment strategy – e.g. according to their geographical region or a more widely spread division of sectors. The question about the correlation of sector indices plays a role that should not be underestimated. Because the range of investments is more restricted and therefore more volatile, the opportunities for yields – but also the risks – may be considerably greater. The diversification effect is largely neutralised by focusing on just one sector. This effect increases if some companies have a strong market position within one sector and their weighting within the index is therefore very high. For example, the weighting of the Finnish mobile phone giant Nokia accounted for more than 35 percent of just 23 securities in the DJ STOXX®600 Technology Index (in August 2007). The correlation would then have a negative effect if the Nokia shares gave ground by several percentage points for individual reasons. This change in market prices would have a negative effect on the whole index because of the strong weighting.
6.7.5 Risk of ETF closures: It is possible that an ETF may not be permanently listed on a stock exchange. It is possible that too few funds flow into an ETF. If the costs of the issuing company are no longer covered by the management fee, e.g. for marketing, administration and licence fees, it is possible that the issuer will close these ETFs. If a fund is closed, the capital, however, is in no way lost. Either the ETF is purchased back at its net inventory value and the current value is paid out in cash, or the invested amount is transferred to a different ETF in the same company at the request of the investor free of charge.
7 Particular risks associated with day trading
7.1 Day trading simply entails making several purchases and sales in the same market during one trading day. This kind of process contains considerable risks, which you need to be aware of:
7.1.1 Positions are held for a very short time: A position opened is closed on the same day. It is possible here that a corresponding position is opened again on the same day and traded several times during the day in the same market. In the case of overnight trades, purchased positions are closed on the next day. The key feature of this kind of trading is that the investor is only active in the market for a short time. Day trades or overnight trades, however, are not any less risky than futures transactions, which customers leave in the market place for longer.
7.1.2 High levels of commission: Necessarily this style of trading involves a large number of transactions. Commission is incurred for each transaction. The commission level will be high compared to the capital invested. If the market does not move sufficiently in favour of the investor, the net effect can be that the investor’s capital is eroded by commission payments.
7.1.3 Potential inbalance of knowledge: By undertaking day trading you will be competing with professional and well-resourced market participants, who will also be attempting to make gains using day trading. You should only undertake day trading if you have an in-depth knowledge of securities markets, securities trading techniques, securities trading strategies and derivative financial instruments.
8 Protection of client money and assets
8.1 We will not, at any stage, hold any client money or assets. At all times, the account holding broker, with whom you will have a customer agreement, will be responsible for the safekeeping of client money and assets.
8.2 Your money and assets are well secured by 5 pillars of security:
8.2.1 Pillar 1 - Segregated deposits: All customer assets are managed by the account holding broker as segregated (separated) assets. This means that monies, securities and other assets are, as required by regulators, separated and will be held separately from the assets belonging to the account holding broker. This is and will be documented continuously. By carefully separating client assets from broker assets in this way, client assets are ring-fenced in the event the broker encounters financial difficulties or enters any formal or informal insolvency process.
8.2.2 Pillar 2- FSCS Financial Services Compensation Scheme: We are authorised in the UK by the FCA. Your investment is therefore protected under the Financial Services Compensation Scheme(up to a maximum of GBP 50,000 per person or business).
8.2.3 Pillar 3- Professional Indemnity Insurance: We have in place professional indemnity insurance with a limit of GBP 3 million per claim. Subject to the applicable terms and conditions, this insurance covers loss that has arisen due to the negligence or misconduct of our employees.
8.2.4 Pillar 4 - Protection of accounts held by US-based entities:
(a) Where the account holding broker is either based in the US or enters into an arrangement whereby your account is held by a US-based broker –dealer that is also a member of the “Securities Investor Protection Corporation” or “SIPC”, SIPC will cover the first USD 500,000 per client (incl. cash up to USD 250,000) of securities and cash held by the broker-dealer. This includes stocks, bonds, government bonds, certificates of deposit, mutual funds, money market funds and other investments. The market value of shares, options, warrants, debt and cash (in any currency) is also protected.
(b) SIPC offers protection in case of a broker-dealer’s misconduct, however, it does not protect from loss of market values of executed investments, e.g. losses due to market fluctuations.
(c) The coverage provided by SIPC does not extend to Non-US index options and Non-US Index futures, and CFDs. To secure coverage for these products the account holding broker-dealer will ensure that each trading account is assigned a UK-regulated account to trade Non-US index options, Non-US Index Futures and CFDs. This results in a security for the UK-regulated account of a maximum of GBP 50,000.
(d) SIPC explicitly does not cover commodity futures contracts (futures, options on futures and single stock futures). In order to benefit from maximum SIPC coverage, the broker-dealer will, periodically, transfer cash from the client’s futures commodity account into the securities account. Thus the client will benefit from SIPC protection in the best possible way.
8.2.5 Pillar 5 - Excess SIPC protection: Where the account-holding broker is US-based or enters into an arrangement whereby your account is held by a US-based broker –dealer, your account will also be protected by an excess SIPC policy issued by certain Lloyd’s of London insurance underwriters, which provides an additional $30 million of cover (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million.