Risks associated with Internet
- Transactions conducted through the Internet may be subject to transmission blackout, interruption, delayed transmission due to Internet traffic, incorrect data transmission due to the public nature of the Internet or any uncertain circumstances out of AASEC’s control and cause errors or delay on order transmission, receiving or execution, including unexecution of effective amendment instruction, the original or unrevised instruction may be executed when the order is intended to be cancelled, instructions to trade may not be executed or may be delayed so that they are executed at prices different from those prevailing at the time the instructions were given, and/or communications and personal data may be accessed by unauthorized third parties. AASEC accepts no liability to you or anyone else for any loss or expense arising from the risks.
- There are risks of your access code or login password being abused or utilised by unauthorised persons. Do not divulge your login ID and password to third parties and change your password regularly. If there is any unauthorised use of your trading or login password, you shall notify AASEC immediately and you agree that you shall bear all risks in connection with any unauthorised use of your trading or login password and you shall indemnify AASEC on demand for any losses, costs, damages, expenses or claims which AASEC may suffer as a result of any unauthorised use of your trading or login password.
Risks of Securities Trading
- The prices of securities fluctuate, sometimes dramatically. The price of securities 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.
- You are subscribing AASEC’s internet trading services, you understand and agree that exchange houses, AASEC and investment-related information providers endeavor to ensure the accuracy and reliability of the real time (delayed) quotation and related investment information provided, but do not guarantee its accuracy and reliability. Exchange houses, AASEC and investment-related information providers accept no liability for any loss or damage arising from any inaccuracy or omission or from any decision, action or non-action based on or in reliance upon the real time (delayed) quotation and related investment information.
- If you amend or cancel your instruction during Pre-open Allocation period and Pause period in The Stock Exchange of Hong Kong Limited, it may cause the change of status of the order and you will be liable for any consequences.
Risks of Trading Growth Enterprise Market Stocks
- Growth Enterprise Market (the “GEM”) stocks involve a high investment risk. In particular, companies may list on the GEM with neither a track record of profitability nor any obligation to forecast future profitability. The GEM stocks may be very volatile and illiquid.
- You should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of the GEM mean that it is a market more suited to professional and other sophisticated investors.
- Current information on the GEM stocks may only be found on the internet website operated by The Stock Exchange of Hong Kong Limited. Companies listed on the GEM are usually not required to issue paid announcements in gazetted newspapers.
- You should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of GEM stocks.
Risk of Trading NASDAQ-AMEX Securities at The Stock Exchange of Hong Kong Limited
- The securities traded under the Nasdaq-Amex Pilot Program (the “PP”) are aimed at sophisticated investors. You should consult AASEC and become familiarised with the PP before trading in the PP securities. You should be aware that the PP securities are not regulated as a primary or secondary listing on The Stock Exchange of Hong Kong Limited or the GEM.
Deposited Cash and Property
- You should familiarise yourself with the protections given to money or other property you deposit for domestic and foreign transactions, particularly in the event of a firm insolvency or bankruptcy. The extent to which you may recover your money or property may be governed by specific legislation or local rules. In some jurisdictions, property, which had been specifically identifiable as your own will be pro-rated in the same manner as cash for purposes of distribution in the event of a shortfall.
Commission and other charges
- Before you begin to trade, you should obtain a clear explanation of all commission, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.
Transactions in Other Jurisdictions
- Transactions on markets in other jurisdictions, including markets formally linked to a domestic market, may expose you to additional risk. Such markets may be subject to regulation which may offer different or diminished investor protection. Before you trade you should enquire about any rules relevant to your particular transactions. Your local regulatory authority will be unable to compel the enforcement of the rules of regulatory authorities or markets in other jurisdictions where your transactions have been affected. You should ask AASEC about the types of redress available in both your home jurisdiction and other relevant jurisdictions before you start to trade.
- The profit or loss in transactions in foreign currency-denominated contracts (whether they are traded in your own or another jurisdiction) will be affected by fluctuations in currency rates where there is a need to convert from the currency denomination of the contract to another currency.
- Electronic trading facilities are supported by computer-based component systems for the order-routing, execution, matching, registration or clearing of trades. As with all facilities and systems, they are vulnerable to temporary disruption or failure. Your ability to recover certain losses may be subject to limits on liability imposed by the system provider, the market, the clearing house and/or participant firms. Such limits may vary; you should ask AASEC for details in this respect.
- Trading on an electronic trading system may differ from trading on other electronic trading systems. If you undertake transactions on an electronic trading system, you will be exposed to risks associated with the system including the failure of hardware and software. The result of any system failure may be that your order is either not executed according to your instructions or is not executed at all.
- In some jurisdictions, and only then in restricted circumstances, firms are permitted to effect off-exchange transactions. AASEC may be acting as your counterparty to the transaction, it may be difficult or impossible to liquidate an existing position, to assess the value, to determine a fair price or to assess the exposure to risk. For these reasons, these transactions may involve increased risks. Off-exchange transactions may be less regulated or subject to a separate regulatory regime. Before you undertake such transactions, you should familiarize yourself with applicable rules and risks associated.
Risk of Providing an Authority to Hold Mail or to Direct Mail to Third Parties
- If you provide AASEC with an authority to hold mail or to direct mail to third parties, it is important for you to promptly collect in person all contract notes and statements of your account and review them in detail to ensure that any anomalies or mistakes can be detected in a timely fashion.
Risk of Client Assets Received or Held Outside Hong Kong
- Client assets received or held by AASEC outside Hong Kong are subject to the applicable laws and regulations of the relevant overseas jurisdiction which may be different from the Securities and Futures Ordinance and the rules made thereunder. Consequently, such client assets may not enjoy the same protection as that conferred on client assets received or held in Hong Kong.
Risk Disclosure Statement for Exchange-Traded Derivative Products
This Risk Disclosure Statement is intended as a general guide to highlight the trading risks of certain types of and derivative products. Ayers Alliance Securities (HK) Limited has endeavored to ensure the accuracy and reliability of the information provided but do not guarantee its accuracy and reliability and accept no liability for any loss or damage arising from any inaccuracies or omissions. For more relevant information, investors may visit the websites of HKEx at www.hkex.com.hk and the SFC at www.sfc.hk.
Risks Associated with Structured Products
Structured products have an expiry date after which the issue may become worthless. Investors should be aware of the expiry time horizon and choose a product with an appropriate lifespan for their trading strategy.
Structured products, such as derivative warrants and callable bull/bear contracts, are leveraged and their value could change rapidly according to the gearing ratio relative to the underlying assets. Investors should be aware that the value of structured products might fall to zero resulting in the total loss of their initial investment.
Outside influences such as market supply and demand factors may cause the price of a structured product to deviate from its theoretical price. As a result, actual traded prices can be higher or lower than the theoretical price.
A structured product issuer could become insolvent and default on there listed securities and in that event investors will be considered as unsecured creditors and will have no preferential claims to any assets held by the issuer. Investors should therefore pay close attention to the financial strength and credit worthiness of structured product issuers.
Uncollateralised structured products are not asset backed. In the event of the bankruptcy of the issuer, investors could lose their entire investment.
Underlying assets of structured products could be denominated in a currency different from an investor’s base currency. Hence, investors are exposed to exchange rate risk. Currency rate fluctuations can adversely affect the value of the underlying asset of a structured product, thereby affecting the price of the structured product.
Liquidity providers assigned by structured product issuers provide two way quotes to facilitate trading of the products. If a liquidity provider defaults or ceases to fulfill its role, investors may not be able to trade the relevant product until a new liquidity provider has been assigned.
Risks Involved in Trading Callable Bull/Bear Contracts (CBBC)
Investors trading CBBCs should be aware of their intraday “knockout” or mandatory call feature. A CBBC will cease trading when the underlying asset value equals the mandatory Call Price as stated in the listing documents. Investors will only be entitled to the residual value of the terminated CBBCs as calculated by the product issuer in accordance with the listing documents, and the residual value can be zero. Once the CBBC is called, even though the underlying asset may bounce back in the right direction, the CBBC, which has been called, will not be revived and investors will not be able to profit from the bounce back. In general, the larger the buffer between the Call Price and the Spot Price of the underlying asset, the lower the probability of the CBBC being called since the underlying asset of that CBBC would have to experience a larger movement in the price before the CBBC will be called. However, at the same time, the larger the buffer, the lower the leverage effect will be.
When the underlying asset is trading close to the Call Price, the price of a CBBC may be more volatile with wider spreads and uncertain liquidity. CBBC may be called at any time and trading will terminate as a result. However, the trade inputted by the investor may still be executed and confirmed by the investors after the Mandatory Call Event (MCE) since there may be some time lapse between Mandatory Call Event time and suspension of the CBBC trading. Any trades executed after the MCE will not be recognized and will be cancelled. Therefore, investors should be aware of the risk and ought to apply special caution when the CBBC is trading close to the Call Price.
The issue price of a CBBC includes funding costs, which are gradually reduced over time as the CBBC moves towards expiry. In the event that a CBBC is called, investors will lose the funding costs for the remaining period of the CBBC.
Risks Involved in Trading Derivative Warrants
All factors being equal, derivative warrants value will decay over time as it approaches expiry. Derivative warrants would have no value upon expiry and should not be viewed as a long-term investment.
Prices of derivative warrants may or may not increase or decrease in line with the implied volatility of underlying asset price. Investors should be aware of the volatility of the underlying asset.
Risks Involved in Trading Exchange Traded Funds (ETF)
An ETF is exposed to the economic, political, currency, legal and other risks of a specific sector or market related to the index and the market that it is tracking.
This is the disparity between the performance of the ETF and the performance of the underlying benchmark. Tracking error may arise due to various factors such as changes in the composition of the underlying benchmark and type of ETF (e.g. physical vs synthetic), failure of the ETF’s tracking strategy, impact of fees and expenses, foreign exchange differences between the base currency or trading currency of the ETF and the currencies of the underlying investments.
As the trading price of the ETF is typically determined by the supply and demand factors, the EFT may trade at a price higher or lower than its Net Asset Value (NAV). In the case when the ETF is terminated, investors who bought at a premium may suffer a loss and would not be able to recover it through the fund.
Investors trading ETFs with underlying assets not denominated in their same local currency are exposed to exchange rate risk. Currency rate fluctuations can adversely affect the value of the underlying asset of an ETF, thus affecting the price of the ETF.
Market makers help to provide liquidity to facilitate trading in ETFs. Although one or more market makers support most ETFs, there is no assurance that active trading will be maintained. In the event that the market makers default or cease to fulfill their role, investors may not be able to buy or sell the ETF or may find the market price of the ETF is at a discount or premium to its NAV.
(A) Full replication and representative sampling strategies
Under a full replication strategy, an ETF generally aims to invest in all constituent stocks/assets in the same weightings as its benchmark. Under a representative sampling strategy, an ETF invests in some, but not all of the relevant constituent stocks/assets. For ETFs that invest directly in the underlying assets rather than through synthetic instruments issued by third parties, counterparty risk tends to be less of concern.
(B) Synthetic replication strategies
Synthetic ETFs may invest in over-the-counter derivatives issued by counterparties and thus may suffer losses potentially equal to the full value of the derivatives issued by a counterparty upon its default. Hence, synthetic ETFs are exposed to both the risks of the underlying stocks / assets as well as the default risk of the counterpart that issues the financial derivative instruments for replicating the performance of the index. Some synthetic ETFs may invest in financial derivatives issued by a number of counterparties to diversify counterparty credit risk concentration. However, the more counterparties an ETF has, the higher the mathematical probability of the ETF being affected by a counterparty default which may lead to losses to the ETF. Synthetic replication ETFs can be further categorized into two forms:
- Swap-based ETFs:
ETF managers may replicate the benchmark performance through total return swaps without purchasing the underlying assets. Swap-based ETFs would expose to counterparty risk of the swap dealers and may suffer losses if such dealers default.
- Derivative embedded ETFs:
ETF managers may synthetically replicate the economic benefit of the relevant benchmark by the use of other derivative instruments. These instruments may be issued by one or multiple issuers. Derivative embedded ETFs would expose to counterparty risk of the instruments’ issuers and may suffer losses if such issuers default. Further, potential contagion and concentration risks of the derivative issuers should be taken into account (e.g. since derivatives issuers are predominantly international financial institutions, the failure of one derivative counterparty of a synthetic ETF may have a “knock-off” effect on the other derivatives counterparty of a synthetic ETF.
Some ETFs may acquire collateral, but it may subject to counterparty risk if the collateral provider is not fulfilling its obligations. There is a further risk that when the right against the collateral is exercised, the market value of the collateral could be substantially less than the amount secured resulting in significant loss to the ETF.
An ETF which engages in stock lending faces the risk that the borrower may not return the securities lent by the ETF as agreed, and thus the ETF may experience losses due to its stock lending activities.
Risks Involved in Trading Equity Linked Instruments (ELIs)
Investors may lose part or all of their investment if the price of the underlying security moves against their investment view.
Investors are exposed to price movements in the underlying security and the stock market, the impact of dividends and corporate actions and counterparty risks. Investors must also be prepared to accept the risk of receiving the underlying shares or a payment less than their original investment.
Investors should note that any dividend payment on the underlying security may affect its price and the payback of the ELI at expiry due to ex-dividend pricing. Investors should also note that issuers may make adjustments to the ELI due to corporate actions on the underlying security.
Investors should consult their brokers on fees and charges related to the purchase and sale of ELI and payment / delivery at expiry. The potential yields disseminated by the Hong Kong Stock Exchange have not taken fees and charges into consideration.
While most ELIs offer a yield that is potentially higher than the interest on fixed deposits and traditional bonds, the return on investment is limited to the potential yield of individual ELIs.
Risks Involved in Trading Stock Options
Transaction in stock options carries a high degree of risk. Purchasers and sellers of stock options should familiarize themselves with the type of option (i.e. put or call) which they contemplate trading and the associated risks. Investors should calculate the extent to which the value of the stock option must increase for investors’ position to become profitable, taking into account the premium and all transaction costs. The purchaser of stock option may offset or exercise the stock option or allow the stock option to expire. The exercise of a stock option results either in a cash settlement or in the purchaser acquiring or delivering the underlying interest. If the purchased stock options expire worthless, the purchaser will suffer a total loss of the purchaser’s investment which will consist of the stock option premium plus transaction costs. If investors are contemplating purchasing deep-out-of-the-money stock options, investors should be aware that the chance of such stock options becoming profitable ordinarily is remote.
Selling (“writing” or “granting”) a stock option generally entails considerably greater risk than purchasing a stock option. Although the premium received by the seller is fixed, the seller may sustain a loss well in excess of that amount. The seller will be liable for additional margin to maintain the position if the market moves unfavourably. The seller will also be exposed to the risk of the purchaser exercising the stock option and the seller will be obligated to either settle the stock option in cash or to acquire or deliver the underlying interest. If the stock option is “covered” by the seller holding a corresponding position in the underlying interest or another stock option, the risk may be reduced. If the stock option is not “covered” (also known as “naked”), the risk of loss can be unlimited. Certain exchanges in some jurisdictions permit deferred payment of the option premium, exposing the purchaser to liability for margin payments not exceeding the amount of the premium. The purchaser is still subject to the risk of losing the premium and transaction costs. When the option is exercised or expires, the purchaser is responsible for any unpaid premium outstanding at that time.
Investors should ask the firm with which investors deal about the terms and conditions of the specific stock option which investors are trading and associated obligations (e.g. expiration dates and restrictions on the time for exercise). Under certain circumstances the specifications of outstanding contracts (including the exercise price of an options) may be modified by the exchange or clearing house to reflect changes in the underlying interest.
Market conditions (e.g. illiquidity) and/or the operation of the rules of certain markets (e.g. the suspension of trading in any contract or contract month because of price limits or “circuit breakers”) may increase the risk of loss by making it difficult or impossible to effect transactions or liquidate/offset positions. If investors have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and the option may not exist. This can occur when, for example, the interest underlying the option is subject to price limits while the option is not. The absence of an underlying reference price may make it difficult to judge “fair value”