Complex Instruments

Complex Instruments

Although financial markets usually advocate the free-market approach, financial authorities limit the investor’s capability to use certain investment tools. This is because they are dangerous because of their complexity. Such tools are called complex instruments. In order to be allowed to use them, any broker or investment firm requires a form in which you state that you know what you are doing and the risks involved.

The basic investment instruments are deposits and stocks. For them, you will not need to complete any form assuring your skillset. On the other hand, if you want to invest with derivatives, CFDs, ETNs, or other complex instruments, you will have to sign the form.

The typical form will have your personal data such as name, surname, account number with the broker, and phone number. It will also contain a description of the instrument. Lastly, on the bottom of the form, you will need to check a couple of boxes. In them, you state that you understand the instrument, you agree that it is right for your situation and investor characteristics, and you recognise the risk of losing all your money or even more due to the investment tool.

If you want advice over this subject, let us know and we will refer you to a suitably qualified professional.

What Are the Typical Complex Instruments Investors Use?

  • Derivatives: Including Investment Trust that embeds a derivative
  • Bonds: Callable bonds, putt-able bonds, perpetual bonds, indexed bonds…
  • Subordinated debt: Debt that does not have priority to be settled
  • Warrants
  • ETCs, ETFs, & ETNs

In general, all the investment products that are not as transparent as stocks require the form.

How Do I Know When I Need to Fill Out the Form?

Once you need it, your broker or financial institution will ask you for it. This form is a way they can prove that they are not cheating you into complex instruments.

If I Am Not Allowed to Use Complex Instruments Because I Do Not Understand Them, How Can I Learn So That I Can Start?

Honestly, the form is just a formality. If you say you know what you are doing, that will be enough for your broker.

Just keep in mind that although the complexity could make these tools attractive due to the high benefits they can give, they are also very dangerous in terms of risks. Therefore, if you have never heard about them, you should not jump to invest with them. First, read about the instrument to understand its risks. Once you start, do it with a small amount of money until you become confident about its particularities.

If you need advice with regards to complex instruments, we are unable to provide that service. We can, however, refer you to a Stockbroker who would be able to advise you, remembering always that investment advice comes with risk. Find your financial advisor on our specific form.