Complex instruments risks
Complex financial instruments – like those listed below – typically involve a high degree of risk. If you invest in these, you need to be aware that you could lose all your money.
Because of the risks of complex financial instruments, you won't be able to deal in them until you complete an online test. This test, required by the regulator, asks you questions about your understanding, experience and knowledge. Once you've completed the test, we'll let you know the outcome online.
A warrant gives you the right to subscribe for shares or other securities within a specific time period, following which the warrant has no value. A relatively small movement in the price of the underlying investment results in a large movement in the price of a warrant. The value of warrants is therefore volatile. You should not buy a warrant unless you are prepared to lose all the money you have invested.
Securitised derivatives are issued by a financial institution and give you the right to acquire or sell one or more types of investment or to speculate on the value of an index during a specific time period. A relatively small movement in the value of an underlying investment or index will result in a much larger movement in the price of the securitised derivative. The price of these investments is therefore volatile. You should not buy a securitised derivative unless you are prepared to lose all the money you have invested. Examples of these types of security are Exchange Traded Notes (ETNs) and Exchange Traded Commodities (ETCs).
Convertibles - excluding convertible British Government stocks
A convertible allows you to convert the investment into another underlying investment on pre-defined terms. The convertible could pay a lower rate of return than a non-convertible investment and the value of the convertible will be affected significantly by price movements in the underlying investment. In some circumstances, because of the link with the value of the underlying investment, convertibles can carry a high degree of risk and their value could fall substantially.
A structured product – also known as a structured capital-at-risk product – is an investment which offers a pre-packaged investment strategy based on derivatives and which delivers a known return for given conditions. It may be based on a single investment, a basket of investments, options, indices, commodities, debt issuances, foreign currencies or swaps or any combination of these. Their reliance on derivatives means that structured products are high risk investments and you could lose all the money you have invested.
Short, Leveraged or Synthetic Exchange Traded Products
Unlike physical replication, a synthetic ETP does not hold the underlying assets the product is designed to track. Instead, the ETP issuer enters into a swap agreement with a counterparty that contracts to provide the return based on the performance of the underlying assets.
Leveraged ETPs use complex financial techniques to increase the potential return of their investment. Short ETPs aim to deliver inverse performance to an underlying index or asset class through the use of derivatives and short selling techniques. Leveraged ETPs amplify gains and losses relative to the underlying index or asset class.
Specialist Collective Investments
A collective investment may be highly specialised and include investment in hedge funds, private equity, infrastructure, property or other illiquid asset classes. It may have a sophisticated structure and/or complex performance related charging and may have exposure to specialist geographical areas or other security types.
To learn more about high risk investments, and five important questions to ask yourself before you consider investing in them, visit https://www.fca.org.uk/consumers/high-return-investments.