In investing, complex instruments are financial products that go beyond the simplicity of traditional investments like stocks or plain bonds. These instruments often have special features, risks, or structures that may make them more difficult to understand and evaluate. Here are some common types:
- Derivatives:* these are financial contracts whose value is based on the performance of an underlying asset, like stocks, bonds, or commodities. Examples include options, futures, and swaps. They can be used for speculation or hedging but involve higher risk.
- Structured products:* these are pre-packaged investments that combine different financial instruments, often including derivatives, to create a customised risk/return profile. They might offer payouts based on the performance of a set of assets but with varying risk levels.
- Complex bonds: these are bonds with added features like being callable, puttable, or convertible into stock, which makes them more difficult to price and assess.
- Leveraged products:* these investments amplify potential gains and losses, often using borrowed money or financial derivatives. They can provide large returns but also expose investors to the risk of significant losses.
*At the time of writing, these instruments are not available on Lightyear
When you want to trade these instruments, Lightyear’s app will first ask you some questions to understand your existing knowledge about them. At the end of the questionnaire, the app will let you know, whether these instruments are considered appropriate for you based on your current knowledge. You can trade complex instruments regardless of the outcome of the questionnaire, however you should consider that you might be taking risks that you are not fully aware of.
Why am I asked to assess my knowledge before trading complex instruments?
An appropriateness assessment is a process used by financial institutions in Europe, to evaluate whether certain financial products, such as complex bonds, are suitable for individual investors. The goal is to ensure that the investor understands the risks, complexity, and characteristics of the product, and has sufficient knowledge and experience to make informed decisions about the investment. This assessment is crucial for protecting investors from taking on risks they might not fully understand, particularly with complex products like complex bonds.
See also: Bonds