Warning: Trading in Financial Instruments is a High Risk Investment!
You should always keep in mind that transactions in financial instruments involve a substantial degree of risk and may not be suitable for all investors, since they can result in significant or even total loss of your funds and of your entire investment. Never invest capital that you cannot afford to lose! All your transactions should be carried out with the use of funds that are not essential to your survival or well-being (surplus/risk capital).
You should be aware of and thoroughly understand all the risks associated with the financial market, eg. trading. Before deciding to invest, in general, you should carefully consider and evaluate your financial condition, the level of your experience and knowledge, your investment objectives and the level of risk you are willing to undertake.
Investments in financial instruments carry risks. Despite the fact that the escalation of these risks may vary, depending on various parameters which will be explained to you later on, investments in financial instruments always involve exposure to risks that cannot be fully covered or hedged. These risks mostly result in the decrease of the value of your investment or even the loss of the entire amount you invested. The following is a brief presentation of the general investment risks:
Market risk: Is the risk arising from unforeseeable changes in basic market factors such as interest rates, share prices/indices, exchange rates, commodity prices/ indices, as well as changes in volatility thereof. Investors, taking a position in the market, run the risk of losing part or all of their invested capital because the prices of their investments drop or move against their respective market position.
Currency risk: Is the risk arising from adverse changes in the exchange rates of the domestic currency of the investor (eg. €) vis-a-vis the currency in which the financial product that he/she has invested in is valuated (eg. $,¥ etc.).
Liquidity risk: Is the risk that a financial product cannot always be liquidated at the first demand of the investor and at a fair/acceptable price. The higher the historical marketability of a financial product, the lesser the liquidity risk it entails.
Inflation risk: Is the risk of loss of the real value of the invested capital due to a larger than expected increase in the inflation.
Early Redemption risk: is the risk inherent in some types of bonds which give the issuer the right to “call” (i.e. withdraw) and repay the holders of the bonds before the maturity date. This risk arises from the unfavorable price for the investor that the bonds will be called.
Leverage risk: Is the risk resulting from the multiplication of the investor’s market risk exposure through the use of financial instruments or borrowed capital which multiply the impact of the initially invested capital. The investor, either by using the margin account in the spot market, and/or by opening a position in the derivatives market, can have an investment position that is much larger than his/her original invested capital. The main consequence of this is that even a small change (positive or negative) in the underlying financial instrument changes the invested capital dramatically. This risk, however, concerns mainly portfolios using derivatives as a means of speculation and not as a hedging instrument. It is apparent that when, and if, the market moves in the opposite direction from the one expected by the investor, he/she runs the risk of losing considerably more money than the capital originally invested.
Systematic risk: Is the risk of adverse changes in the value of a financial instrument due to factors inherent in the very nature of the market itself. In its most apparent form, it is the risk arising from the correlation of a stock's price with the market trend.
Operational risk: It is the risk arising because of inadequate or failed internal processes, personnel, information or communication systems, as well as external factors such as natural disasters or terrorist attacks, which may disable the settlement systems or reduce the value of the assets in a transaction (eg. the risk of collapse of the communication systems of a regulated market or an equities company, the risk of loss from the improper administration of a company with securities listed on a stock exchange, etc.).
The Operational risk includes also legal risk, which arises in the failure to execute contracts due to legal problems, etc. This can happen as a result of an incorrect legal assessment, but also because of legal uncertainty, notably due to unclear, vague and general legislation. Under this risk, an agreement can be judged or made invalid, contrary to the initial estimates of the firms involved, with unfavorable economic consequences for the respective parties.
Concentration risk: It is the risk assumed by the investor who invests all his/her available capital in a single financial instrument. It is the opposite of risk diversification where the investor places his/her capital in a number of financial instruments, with different characteristics, having shown considerable complementarity over time.