Choice of Investment Strategy
Prior placing financial funds into investment instruments, we recommend the client to become thoroughly familiar with all aspects connected therewith and to determine an individual investment strategy on the base of criteria the client sets (level of the acceptable risk, investment period, expected return, etc.). The manager of the client’s assets is then obliged to follow the chosen strategy.
In this respect, KEY INVESTMENTS recommends all its new clients to assume conservative investment strategy, built on investment instruments such as quality bonds, term transactions and term deposits.
Compulsorily disclosed information: Information on particularities and risks of investments into investment instruments.
Classification and description of risks
Investing into the investment instruments is connected with risk. KEY provides below a list of the main risks, which may be connected with the provided services, including their brief description. The provided list of risks is only demonstrative, each client can get an full overview of risks during negotiations with the officers in charge, as well as from the General Terms and Conditions, Information Bulletins sent to clients, letters or other official KEY information.
Currency risk: In the case of investing into foreign securities, the return depends also on the development of the exchange rate of the foreign currency to the Czech Crown. It means that the return and the value of such investment can be increased or decreased by the fluctuation of the exchange rate. The risk of effecting investment and return transfer: There is an additional risk when investing into foreign securities, namely that the politic or currency measures in the home land of the issuer may complicate or even prevent effecting of investment or obstruct free convertibility of the currency. Country risk: Political or economic situation, which endangers credibility of the particular country, may have a negative impact on all trading partners residing or having their seat in such a country. Liquidity risk: There is a risk, that a particular market of the securities are kept may become too flat (i.e., that a common order to sell may cause a significant price swing and it may become impossible to sell at all or to sell only at a significantly lower price) and it will not be possible to sell them at the current price in the requested time period. Issuer risk: There is a risk that the issuer of securities will not be able to fulfil its obligations, such as paying out of dividends, paying of interests or paying back of principal. Interest rate risk: Risks of a loss incurred in relation to future changes in the interest rates. Price risk: Risk of unfavourable price fluctuations of the kept securities.
Risks of investments into bonds
A bond is a security, which obliges its issuer to pay out to the owner the interest on the invested capital and to pay up the nominal value according to the terms of their issuance. The total return includes the interest received and the difference between the purchase and the sales price decreased by the transaction costs. This return can be exactly determined in advance only if the bond is kept till its maturity. In order to compare bonds, the so called return to maturity is calculated; in case that return is significantly higher than average, it should be ascertained if that could be caused by the increased credit risk. The credit risk is the risk of the issuer’s failure to pay, e.g. due to insolvency. Therefore the issuer’s credit standing must always be assessed when considering investing into bonds. “Credit ratings” published by specialized independent agencies may serve as a useful guide. The price risk comes into question if the investment is made into a bond without the intention to keep it till its maturity date. The market price is created by the market supply and demand and depends on the development of the interest rates and on changes in the issuer’s credibility. Liquidity risk depends on a number of factors, such as the volume of issuance, the remaining time to their maturity date, market conditions, etc. The bond that is hard to sell or that is not possible to sell at all is to be kept till its maturity date. In the case of the unlisted securities the liquidity risk comes particularly in question. This risk can be partly eliminated by impartial and professional assessment of the quality of the given security or of its issuer (i.e. by the rating agency).
Risk of investments into shares
A share is a security, which demonstrates the owner’s participation in the issuer’s assets. Among the fundamental owner’s rights belong the right to participate in the profit of the issuer and the right to vote on the general meeting. The total return includes the received dividend payments and the difference between the purchase price and the sales price. The ratio between the paid out dividend and the price of share is called the return on dividends. The credit risk involves the danger that shares may become worthless mainly due to the issuer’s going bankrupt. The price risk originates in determining the share price on the basis of the supply and demand meeting on the public market. Generally, the price depends on economic prosperity of the issuer (individual risk) as well as on the overall political and economic circumstances (market risk). Liquidity risk depends on a number of factors, such as the number of issued shares, structure of owners of the issuer’s shares, market conditions, etc. Liquidity risk comes into question for example in unlisted securities; it is possible to eliminate partially such risk by objective and professional assessment of quality of the security or its issuer (e.g. by a rating agency).
Counterparty risk / risk of buy&sell (repo) transactions
The counterparty risk lies in possible failure to fulfil obligations by the other party (business partner). This risk can be effectively eliminated by choosing reliable business partners. The risk is minimised if the securities and financial means are settled in a standard manner through the public market organiser. A carefully defined investment strategy for a particular client and its incorporation in contracts sets exact limits and framework for the administrator’s operation and thus the investments are placed only into the investment instruments chosen by the client. The risk of the buy&sell (repo) transactions mainly results from the possible drop in the market price of the securing securities, which the provider of the financial funds has on its account as an instrument securing the loan repayment. In such a case, the transaction is additionally secured (by providing cash or securities by the debtor) so that security of the investment is kept. The risk of buy&sell (repo) transactions can be limited by a good choice of the party to trade with.