Information on investment risks

The advice given below is designed as a primer for investing in money market and capital market instruments, and to help you recognize and define your own risk tolerance for investments. The information presented here however cannot replace talking in person with your account manager.

Therefore, we request that you read this information carefully. Your account manager will gladly answer any questions you might have.

Risk means the possibility of failing to achieve the expected return on an investment and/or losing all or part of the invested capital. Such risk may be due to a variety of causes, depending on the specific structure of the product concerned. Such causes may be inherent in the product, the markets, or the issuer. Since risks are not always foreseeable, the following discussion must not be considered to be conclusive.

In any case, investors should pay particularly close attention to any risk related to the credit rating of the issuer of a product, which always depends on the individual case.

The description of the investment products is based on the most typical product characteristics. The decisive factor is always the specific structure of the product in question. For that reason, the following description is no substitute for a thorough examination of the specific product by the investor.

Generally, the following should be kept in mind when investing in securities:

  1. The potential return of every investment depends directly on the degree of risk. The higher the potential return, the higher the risk.
  2. Irrational factors (sentiment, opinions, expectations, rumors) may also impact prices and thus the return on your investment.
  3. Investing in several different types of securities can help to reduce the risk of the overall position (principle of risk diversification).
  4. Every customer is responsible for the proper taxation of his or her investment. The credit institution is not permitted to give tax advice outside the scope of investment advice.

Currency risk
In the case of transactions in foreign currency, the return and performance of an investment depends not only on the local yield of the security in the foreign market, but also heavily on the exchange rate development of the respective foreign currency relative to the currency of the investor (e.g. euro). This means that exchange rate fluctuations may increase or decrease the return and value of the investment.

Transfer risk
Depending on the respective country involved, securities of foreign issuers pose the additional risk that political or exchange-control measures may complicate or even prevent the realisation of the investment. In addition, problems in connection with the settlement of an order may occur. In the case of foreign-currency transactions, such measures may obstruct the free convertibility of the currency.

Country risk
The country risk is the creditworthiness of a given country. The political or economic risk posed by a country may have negative consequences for all counterparties residing in this country.

Liquidity risk
Tradability (liquidity) refers to the possibility of buying or selling a security or closing out a position at the current market price at any time whatsoever. The market in a particular security is said to be narrow if an average sell order (measured by the usual trading volume) causes perceptible price fluctuations and if the order cannot be settled at all or only at a substantially lower price.

Credit risk
Credit risk refers to the possibility of counterpart default, i.e. the inability of one party to a transaction to meet obligations such as dividend payments, interest payments, repayment of principal when due or to meet such obligations for full value. Also called repayment risk or issuer's risk. Such risks are graded by means of “ratings”. A rating is scale of evaluation used to grade an issuer’s creditworthiness. The rating is prepared by rating agencies, notably on the basis of credit risk and country risk. The rating scale ranges from “AAA” (best credit rating) to “D” (worst credit rating).

Interest rate risk
The risk that losses will be incurred as a result of future interest rate movements in the market. A rise in interest rates on the market will lower the market price of a fixed-interest bond, whereas a fall in such interest rates will raise the market price of the bond.

Price risk
The risk of adverse movements in the value of individual investments. In the case of contingent liability transactions (forward exchange deals, futures, option writing, etc.), it is therefore necessary to provide collateral (margin requirement) or to put up further margin, which means tying up liquidity.

Risk of total loss
The risk that an investment may become completely worthless, e.g. due to its conception as a limited right. Total loss can occur, in particular, when the issuer of a security is no longer capable of meeting its payment obligations (insolvent), for economic or legal reasons.

Buying securities on credit
The purchase of securities on credit poses an increased risk. The credit raised must be repaid irrespective of the success of the investment. Furthermore, the credit costs reduce the return.

Placing orders
Buy or sell orders placed with the bank must at least indicate the designation of the investment, the quantity (number of securities/principal amount) to be purchased or sold, at what price the transaction should be carried out and over what period of time the order is valid.

Price limit
If buy or sell orders are placed with the instruction "at best" (no price limit), deals will be executed at the best possible price. This way, the capital requirement/selling proceeds remain unceratin. With a buy limit, the purchase price and thus the amount of capital employed is limited. No purchases will be made above the price limit. A sales limit stipulates the lowest acceptable selling price; no deals will be carried out below this price limit.

Important note: A stop market order will not be executed until the price formed on the stock reaches the selected stop limit. Once the order has been executed, it will enter into effect as an “at best” order, i.e. with no price limit. The price actually obtained may therefore differ significantly from the selected stop limit, especially in the case of securities on a tight market.

Time limit
You can set a time limit to determine the validity of orders. The period of validity of unlimited orders depends on the practices of the respective stock market.

Your CA investment adviser will inform you of further additions which can be made when placing an order.

The term “guaranty” may have a variety of meanings. The first meaning is the commitment made by a third party other than the issuer in order to ensure that the issuer will meet its liabilities. Another meaning is a commitment made by the issuer itself to perform a certain action regardless of the trend in certain indicators that would otherwise determine the amount of the issuer’s liability. Guaranties may also be related to a wide variety of other circumstances.

Capital guaranties are usually enforceable only until end of term (repayment), so that price fluctuations (price losses) are quite possible during the term. The quality of a capital guaranty depends to a significant extent on the guarantor’s creditworthiness.

Tax considerations
Your CA investment adviser will provide you with information on the general fiscal aspects of the individual investment products. The impact of an investment on your personal tax bill must be evaluated together with a tax consultant.

Risks on stock markets, especially secondary markets (e.g. Eastern Europe, Latin America, etc.)
There is no direct line of communications with most of the stock exchanges on secondary markets, i.e. all the orders must be forwarded by telephone. This can lead to mistakes or time delays.

In certain secondary stock markets, limited buy and sell orders are generally not possible. This means that limited orders cannot be given until the request has been made by telephone with the local broker, which can lead to time delays. In certain cases, such limits cannot be executed at all.

In certain stock markets it is difficult to receive the current prices on an ongoing basis, which makes it difficult to assess the customer’s existing position.

If a trading quotation is discontinued on stock exchange, it may no longer be possible to see such securities on the exchange in question. A transfer to another stock market may also cause problems.

In certain exchanges of secondary markets, the trading hours by no means correspond to Western European standards. Short trading hours of only three or four hours per day can lead to bottlenecks or failure to process securities orders.

Bonds (= debentures, notes) are securities that obligate the issuer (= debtor) to pay the bondholder (= creditor, buyer) interest on the capital invested and to repay the principal amount according to the bond terms. Besides such bonds in the strict sense of the term, there are also debentures that differ significantly from the above-mentioned characteristics and the description given below. We refer the reader in particular to the debentures described in the “Structured Products” section. Especially in that area, it is not the designation as a bond or debenture that is decisive for the product-specific risks but rather the specific structure of the product.

The bond yield is composed of the interest on the capital and any difference between the purchase price and the price achieved upon sale/redemption of the bond.

Consequently, the return can only be determined in advance if the bond is held until maturity. With variable interest rates, the return cannot be specified in advance. For the sake of comparison, an annual yield (based on the assumption of bullet repayment) is calculated in line with international standards. Bond yields which are significantly above the generally customary level should always be questioned, with an increased credit risk being a possible reason.

The price achieved when selling a bond prior to redemption (market price) is not known in advance. Consequently, the return may be higher or lower than the yield calculated initially. In addition, transaction costs, if any, must be deducted from the overall return.

Credit risk
There is always the risk that the debtor is unable to pay all or part of his obligations, e.g. in the case of the debtor's insolvency. The credit standing of the debtor must therefore be considered in an investment decision.

Credit ratings (assessment of the creditworthiness of organisations) issued by independent rating agencies provide some guidance in this respect. The highest creditworthiness is "AAA" (e.g. for Austrian government bonds). In the case of low ratings (e.g. "B" or "C"), the risk of default (credit risk) is higher but by way of compensation the instruments generally pay a higher interest rate (risk premium). Investments with a rating comparable to BBB or higher are generally referred to as “investment grade”.

Price risk
If a bond is kept until maturity, the investor will receive the redemption price as stated in the bond terms. Please note the risk of early calling-in by the issuer, to the extent permitted by the terms and conditions of the issue.

If a bond is sold prior to maturity, the investor will receive the current market price. This price is regulated by supply and demand, which is also subject to the current interest rate level. For instance, the price of fixed-rate securities will fall if the interest on bonds with comparable maturities rises. Conversely, bonds will gain in value if the interest on bonds with comparable maturities falls.

A change in the issuer's creditworthiness may also affect the market price of a bond.

In the case of variable-interest bonds whose interest rate is indexed to the capital market rates, the risk of the interest being or becoming flat is considerably higher than with bonds whose interest rate depends on the money market rates.

The degree of change in the price of a bond in response to a change in the interest level is described by the indicator “duration”. The duration depends on the bond’s residual time to maturity. The bigger the duration, the greater the impact of changes of the general interest rate on the price, whether in a positive or negative direction.

Liquidity risk
The tradability of bonds depends on several factors, e.g. issuing volume, remaining time to maturity, stock market rules and market conditions. Bonds which are difficult to sell or cannot be sold at all must be held until maturity.

Bond trading
Bonds are traded on a stock exchange or over-the-counter. Your bank will quote buying and selling rates for certain bonds upon request.

There is no entitlement to negotiability, however.

In the case of bonds that are also traded on the stock market, the prices formed on the exhange may differ considerably from the off-the-market quotations. The risk of weak trading may be restricted by adding a limit on the order.

Some special bonds

Supplementary capital bonds
These are special subordinated bonds issued by Austrian banks. Interest payment can only be made if the bank has posted sufficient net profit for the year (before movement of reserves). Repayment of the capital prior to liquidation is subject to prorated deduction of the net loss accruing throughout the term of the supplementary capital bond.

Subordinated bank bonds
In case of the debtor's liquidation or insolvency, the investor will receive money only after all other, non-subordinated liabilities of the bond debtor have been settled. It is not possible to offset the claims to repayment arising out of the subordinated bond against the bond issuer’s claims.

High-yield bonds
High-yield bonds are securities for which an issuing entity (= debtor, issuer) with a low credit rating commits itself to the payment of fixed or variable interest on the capital received and to repay the capital to the holder (= creditor, buyer) in accordance with the terms of issue.

Your customer adviser will be pleased to inform you about further special bond types such as bonds with warrants, convertible bonds, zero-coupon bonds, etc.

Austrian investment funds

Certificates of participation in Austrian investment funds (investment fund certificates) are securities which evidence joint ownership in an investment fund. Investment funds invest the funds provided by investors in accordance with the principle of risk diversification. The three basic types of investment funds are bond funds, stock funds as well as mixed funds, investing both in bonds and stocks. Funds may invest in domestic and/or foreign securities.

The range of investment of domestic investment funds includes not only securities but also money market instruments, liquid financial investments, derivative products and investment fund shares. Investment funds may invest in foreign and domestic securities.

Moreover, funds are subdivided into investment funds (which pay dividends), growth funds (which do not pay dividends), and “funds of funds”. Unlike investment funds, growth funds do not pay out dividends but rather reinvest them in the fund. Funds of funds invest in other domestic and/or foreign funds. Guaranty funds are subject to a binding commitment by a guarantor commissioned by the fund with respect to distributions of dividends for a certain period, repayment of principal, or performance.

The return on investment fund certificates is composed of the annual distributions (provided they are not distributing and non-accumulative funds) and the trend in the value of the certificates. It cannot be established in advance. The trend in value depends on the investment policy specified in the fund terms, as well as the market trends of the individual securities held by the fund. Depending on the composition of a fund's portfolio, the relevant risk warning notices for bonds, stocks or warrants must be taken into account.

Price/rating risk
Investment fund certificates can normally be returned at any time at the repurchase price. Under exceptional circumstances, the repurchase of certificates can be temporarily suspended until the sale of fund assets and the receipt of sales proceeds. Your investment adviser will be pleased to inform you about any fees charged and the execution date of your buy and sell orders. The term of an investment fund depends on the fund conditions and is usually unlimited. Please keep in mind that investment fund certificates, unlike bonds, are not normally redeemed and, consequently, do not carry a fixed redemption price. The risk of investment fund certificates depends, as already mentioned, on the fund's stated investment objectives and the market trends. A loss cannot be ruled out. Although investment fund certificates can normally be returned at any time, they are instruments designed for investments over a prolonged period of time.

Like stocks, funds can be traded on exchanges. The prices that arise on the exchange in question may differ from the redemption price. In that regard please see the information on risks related to stocks.

Tax considerations
The fiscal treatment of investment fund distributions varies according to the type of investment fund.

Foreign investment companies

Foreign investment companies are governed by separate legal provisions, which may substantially differ from those applicable in Austria. In particular, stipulations on supervision are often less severe than in Austria.

Outside Austria, there are also closed-end funds and funds ruled by corporate law, whose prices are regulated by supply and demand rather than the intrinsic value of the fund, which is roughly comparable to the establishment of stock prices.

Regardless of their legal form, the dividends and return distributed by foreign investment companies (e.g. non-distributing funds), the earnings equivalent to distribution payments are subject to other fiscal stipulations.

Exchange Traded Funds

Exchange Traded Funds (ETFs) are fund shares that are traded like equities on a stock exchange. An ETF generally forms a basket of securities (e.g. a basket of stocks) that reflects the composition of an index, i.e. that tracks the index in one certificate by means of the securities contained in the index and their current weighting, so that ETFs are often referred to as “index stocks”.

The return depends on the price trend of the underlying securities in the securities basket.

The risk depends on the underlying securities in the security basket.

Money-market instruments include certificated money market investments and borrowings such as certificates of deposit (CDs), cash deposit certificates, global note facilities, commercial paper as well as all notes with a maturity of up to five years for the repayment of principal and fixed interest rates for up to one year. Money market transactions also include genuine repurchase transactions and agreements.

Return and risk component
The return and risk components of money market instruments are largely equivalent to those of bonds/debentures. Differences relate mainly to the liquidity risk.

Liquidity risk
As a rule, there are no organised secondary markets for money market instruments. Consequently, it cannot be guaranteed that the instruments can be sold readily.

Liquidity risk becomes of secondary importance if the issuer guarantees payment of the invested capital at any time and is sufficiently creditworthy to do so.

Money market instruments – explained clearly:

Certificates of Deposit
Money market securities issued by banks, generally with a maturity of 30 to 360 days.

Public notes   
Money market securities issued by banks, generally with a maturity up to 5 years.

Commercial Paper     
Money market securities, short-term notes issued by major corporations, generally with a maturity of 5 to 270 days.

Global Note Facility   
A variation on the commercial paper facility that enables the issuing of commercial paper simultaneously in the USA and on markets in Europe.

Short-term capital market instruments, generally with a maturity of 1 to 5 years.