Margin Trading

Margin trading, where you buy securities using borrowed funds, significantly increases risk. Losses may exceed your initial investment because you are leveraging borrowed capital. You may be required to provide additional funds on short notice to maintain your positions (margin calls). Failure to meet margin calls may lead to the forced sale of your securities collateral without your consent, possibly at unfavourable prices, and you remain liable for any resulting deficits. The use of stop-loss or other risk-reducing orders may not be effective in fast-moving or illiquid markets, potentially exacerbating losses.

 

Securities Trading

The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities.

 

Stock Index Futures

The price of stock index futures contracts may not correlate perfectly with the movement in the underlying stock index because of certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, market participants may close futures contracts through offsetting transactions that would distort the normal relationship between the index and futures markets. Secondly, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market also may cause price distortions.

 

Futures Contracts

Trading futures contracts involve significant risks primarily due to the use of leverage (or gearing). In futures trading, you are required to post only a small initial margin relative to the total contract value, which means that even small market movements can result in disproportionately large gains or losses. Futures contracts are subject to daily settlement and margin requirements, and sudden price swings can trigger margin calls requiring prompt additional funding to maintain your positions. Moreover, the expiry dates and specific contract terms of futures may complicate the unwinding or closing of positions. Clients must meet margin calls on short notice or risk having their positions forcibly liquidated, potentially at unfavourable prices.

 

Forward Contracts

Forward contracts, unlike futures contracts, are not traded on exchanges and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and "cash" trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience periods of illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have refused to quote prices for certain currencies or commodities or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell.  Disruptions can occur in any market traded due to unusually high trading volume, political intervention or other factors.

 

Options

Options trading carries a variable degree of risk depending on whether you are the buyer or the seller (writer) of the option. Buyers risk losing the entire premium paid, while sellers may face substantial or even unlimited losses. Options prices are influenced by complex factors including volatility, time decay, and movements in the underlying asset’s price. Like futures, options may face liquidity constraints and market risks that can affect your ability to close or offset positions. Both futures and options can be complex products, often involving increased volatility and requiring a good understanding of contract terms, as well as recognition of the risks related to margin requirements, contract expiry, and the potential limitations of risk-reducing orders or strategies.

 

Equity Financial Instruments

Clients may invest in equities, equity-linked securities and equity derivatives. The value of these financial instruments generally will vary with the performance of the issuer and movements in the equity markets. As a result, you may suffer losses if it invests in equity instruments of issuers whose performance diverges from expectations or if equity markets generally move in a single direction and your account has not hedged against such a general move. Clients also may be exposed to risks that issuers will not fulfill contractual obligations such as, in the case of convertible financial instruments or private placements, delivering marketable common stock upon conversions of convertible financial instruments and registering restricted financial instruments for public resale.

 

Equity Price Risk

Equity securities fluctuate in value in response to many factors, including, among others, the activities and financial condition of individual companies, geographic markets, industry market conditions, interest rates and general economic environments. In addition, events such as the domestic and international political environments, terrorism and natural disasters, may be unforeseeable and contribute to market volatility in ways that may adversely affect investments made.

 

Preferred Stock

Preferred stock generally has a preference as to dividends and upon the event of liquidation over an issuer's common stock, but it ranks junior to debt securities in an issuer's capital structure. Preferred stock generally pays dividends in cash (or additional shares of preferred stock) at a defined rate, but unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer's board of directors. For these reasons, the value of preferred stocks will usually react more strongly than bonds and other debt to actual or perceived changes in the company's financial condition or prospects. Dividends on preferred stock may be cumulative, meaning that, in the event the issuer fails to make one or more dividend payments on the preferred stock, no dividends may be paid on the issuer's common stock until all unpaid preferred stock dividends have been paid. Preferred stock may also be subject to optional or mandatory redemption provisions.

 

Convertible Securities

A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. If a convertible security is called for redemption, you will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Any of these actions could have an adverse effect on a client’s ability to achieve their investment objective.

 

Exchange Traded Funds

Exchange traded funds ("ETFs") are shares of publicly-traded unit investment trusts, open-end funds, or depository receipts that seek to track the performance and dividend yield of specific indexes or companies in related industries. These indexes may be either broad-based, sector-based, or international. However, ETF shareholders are generally subject to the same risk as holders of the underlying securities they are designed to track. ETFs are also subject to certain additional risks, including, without limitation, the risk that their prices may not correlate perfectly with changes in the prices of the underlying securities they are designed to track, and the risk of trading in an ETF halting due to market conditions or other reasons, based on the policies of the exchange upon which the ETF trades.

 

Real Estate-Related Financial Instruments

Financial Instruments issued by entities which invest in real estate, including REITs, generally will be subject to the risks incident to the ownership and operation of commercial real estate and/or risks incident to the making of nonrecourse mortgage loans secured by real estate. Such risks include, without limitation, the risks associated with both the domestic and international general economic climates; local real estate conditions; risks due to dependence on cash flow; risks and operating problems arising out of the absence of certain construction materials; changes in supply of, or demand for, competing properties in an area (as a result, for instance, of over-building); the financial condition of tenants, buyers and sellers of properties; changes in availability of debt financing; energy and supply shortages; changes in the tax, real estate, environmental, and zoning laws and regulations; various uninsured or uninsurable risks; natural disasters; and the ability of your account or third-party borrowers to manage the real properties.

 

Initial Public Offerings

Investments in initial public offerings (or shortly thereafter) may involve higher risks than investments issued in secondary public offerings or purchases on a secondary market due to a variety of factors, including, without limitation, the limited number of shares available for trading, unseasoned trading, lack of investor knowledge of the issuer and limited operating history of the issuer. In addition, some companies in initial public offerings are involved in relatively new industries or lines of business, which may not be widely understood by investors. Some of these companies may be undercapitalized or regarded as developmental stage companies, without revenues or operating income, or the near-term prospects of achieving them. These factors may contribute to substantial price volatility for such securities.

 

Growth Enterprise Market Stocks

Investing in Growth Enterprise Market (GEM) stocks carries additional risks compared to mainboard securities. GEM stocks typically have smaller market capitalizations, less liquidity, higher price volatility, and often limited operating histories, making them more speculative and susceptible to larger price swings.

 

NASDAQ-Amex Securities at The Stock Exchange of Hong Kong Limited

Trading NASDAQ-Amex securities listed on the Hong Kong Stock Exchange involves the risks associated with foreign securities, including greater volatility, liquidity constraints, and regulatory differences. Clients should be aware that the PP securities are not regulated as a primary or secondary listing on the Main Board or the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.

 

American Depositary Receipts and Global Depositary Receipts

ADRs are receipts issued by a US bank or trust company evidencing ownership of underlying securities issued by foreign issuers. ADRs may be listed on a national securities exchange or may be traded in the over-the-counter market.  GDRs are receipts issued by either a US or non-US banking institution representing ownership in a non-US company's publicly traded securities that are traded on foreign stock exchanges or foreign over-the-counter markets. Holders of unsponsored ADRs or GDRs generally bear all the costs of such facilities. The depository of an unsponsored facility frequently is under no obligation to distribute investor communications received from the issuer of the deposited security or to pass through voting rights to the holders of depositary receipts in respect of the deposited securities. Investments in ADRs and GDRs pose, to the extent not hedged, currency exchange risks (including blockage, devaluation and non-exchangeability), as well as a range of other potential risks relating to the underlying shares, which could include expropriation, confiscatory taxation, imposition of withholding or other taxes on dividends, interest, capital gains or other income, political or social instability or diplomatic developments that could affect investments in those countries, illiquidity, price volatility and market manipulation. In addition, less information may be available regarding the underlying shares of ADRs and GDRs, and non-US companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to, or as uniform as, those of US companies. Such risks may have a material adverse effect on the performance of such investments and could result in substantial losses.

 

General Emerging Market Risk

Investment in emerging market securities involves a greater degree of risk than investment in securities of issuers based in developed countries. Among other things, emerging market securities investments may carry the risks of less publicly available information, more volatile markets, less strict securities market regulation, less favorable tax provisions, and a greater likelihood of severe inflation, unstable currency, war and expropriation of personal property than investments in securities of issuers based in developed countries. In addition, the investment opportunities of your account in certain emerging markets may be restricted by legal limits on foreign investment in local securities.  Emerging markets generally are not as efficient as markets in developed countries.  Volume and liquidity levels in emerging markets are generally lower than in developed countries. When seeking to sell emerging market securities, little or no market may exist for the securities and transactions may need to be made on a neighboring exchange. In addition, issuers based in emerging markets are not generally subject to uniform accounting and financial reporting standards, practices and requirements comparable to those applicable to issuers based in developed countries, thereby potentially increasing the risk of fraud or other deceptive practices. Furthermore, due to quality and reliability concerns, official data published by the government or securities exchanges in emerging markets may not accurately reflect the actual circumstances being reported.

 

The foregoing list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in an investment.