Whatever product you choose for your investments, there is always a risk associated with trading it. The value of investments can go up as well as down and you may receive back less than what you originally invested or lose your investment entirely. Investments for which you expect high returns often involve higher risks as well. You should always keep these risks in mind carefully when trading.
This page is aimed at providing an overview of the specific risks involved with trading shares and ETFs. The list below is meant to lay out a summary of risks as good and complete as possible, but it is not collectively exhaustive. It is important to always be aware of the fact that there are risks involved in trading, and you should consider carefully if you are prepared to and can afford to run these risks.
Before opening an investment account with BUX Zero, you must be aware of the involved risks and agree that you have read and understood these risks. Please read this page carefully before continuing the on-boarding process for opening an investment account for shares with BUX Zero.
Risks involved in trading shares
Market risk is the risk of the value of the securities you invested in declining due to market circumstances and factors that affect the overall performance of the financial markets.
Securities can fluctuate in price. Price risk is the risk of a decline in the price of a security. For shares, it is mainly influenced by the performance of the company you invested in and developments in the sector in which that company is active.
When a company you invested in defaults, its shares lose their value. In this case, there is a clear risk of losing (part of) your investment and not getting back your invested amount.
The political and economic stability of the country in which the company you invested in is established and/or active, can have an influence on the price of its shares. If a country becomes unstable, this can lead to increased risks.
Liquidity risk is the risk of limited marketability. The liquidity of a share depends on the volume of outstanding shares available for trade (the free float) and the volume of the transactions in that share. If the market is not sufficiently liquid, you run the risk of being unable to sell your shares or being unable to do so for a reasonable price.
Currency exchange risk
Currency exchange risk occurs when you trade in other currencies than the euro. If the exchange rate of the other currency compared to the euro changes, this will impact the value of your investment.
Timing Risk (applies to Zero Order)
Timing Risk applies to Zero Orders only. Zero Orders are orders which are executed during an execution window. Due to the inherent nature of a moving market, it is likely that the execution price will differ from the price at the moment of instructing the Zero Order.
3 Specific Risks of investing in ETFs
Securities Lending risk
ETFs that use physical replication have the most transparent structure. The securities are actually held in the ETF. However, physical ETFs may lend these securities (known as securities lending) to generate additional returns for the fund. While this generates additional income for the fund, it does create counterparty risk just like synthetic replication.
Under a full replication strategy, an ETF generally aims to invest in all constituent stocks/assets with the same weightings as its benchmark. Under a representative sampling strategy, an ETF invests in some, but not all the relevant constituent stocks/assets. However, even for ETFs that invest directly in the underlying assets rather than through synthetic instruments issued by third parties, there still exists a counterparty risk, as mentioned in the “Securities Lending risk” section above.
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, but not limited to, the following:
- Changes in the composition of the underlying benchmark or 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.