RISK DISCLOSURE DOCUMENT FOR CAPITAL MARKET AND DERIVATIVES SEGMENTS
This document contains important information on trading in
Equities/Derivatives Segments of the stock exchanges. All
prospective constituents should read this document before
trading in Equities/Derivatives Segments of the Exchanges.
Stock exchanges/SEBI does neither singly or jointly and
expressly nor impliedly guarantee nor make any representation
concerning the completeness, the adequacy or accuracy of this
disclosure document nor have Stock exchanges /SEBI endorsed or
passed any merits of participating in the trading segments. This
brief statement does not disclose all the risks and other
significant aspects of trading.
In the light of the risks involved, you should undertake
transactions only if you understand the nature of the
relationship into which you are entering and the extent of your
exposure to risk.
You must know and appreciate that trading in Equity shares,
derivatives contracts or other instruments traded on the Stock
Exchange, which have varying element of risk, is generally not
an appropriate avenue for someone of limited resources/limited
investment and/or trading experience and low risk tolerance. You
should therefore carefully consider whether such trading is
suitable for you in the light of your financial condition. In
case you trade on Stock exchanges and suffer adverse
consequences or loss, you shall be solely responsible for the
same and Stock exchanges/its Clearing Corporation and/or SEBI
shall not be responsible, in any manner whatsoever, for the same
and it will not be open for you to take a plea that no adequate
disclosure regarding the risks involved was made or that you
were not explained the full risk involved by the concerned stock
broker. The constituent shall be solely responsible for the
consequences and no contract can be rescinded on that account.
You must acknowledge and accept that there can be no guarantee
of profits or no exception from losses while executing orders
for purchase and/or sale of a derivative contract being traded
on Stock exchanges.
It must be clearly understood by you that your dealings on Stock
exchanges through a stock broker shall be subject to your
fulfilling certain formalities set out by the stock broker,
which may inter alia include your filling the know your client
form, reading the rights and obligations, do’s and don’ts, etc.,
and are subject to the Rules, Byelaws and Regulations of
relevant Stock exchanges, its Clearing Corporation, guidelines
prescribed by SEBI and in force from time to time and Circulars
as may be issued by Stock exchanges or its Clearing Corporation
and in force from time to time.
Stock exchanges does not provide or purport to provide any
advice and shall not be liable to any person who enters into any
business relationship with any stock broker of Stock exchanges
and/or any third party based on any information contained in
this document. Any information contained in this document must
not be construed as business advice. No consideration to trade
should be made without thoroughly understanding and reviewing
the risks involved in such trading. If you are unsure, you must
seek professional advice on the same.
In considering whether to trade or authorize someone to trade
for you, you should be aware of or must get acquainted with the
following:-
1. BASIC RISKS:
1.1 Risk of Higher Volatility:
Volatility refers to the dynamic changes in price
that a security/derivatives contract undergoes when trading
activity continues on the Stock Exchanges. Generally, higher the
volatility of a security/derivatives contract, greater is its
price swings. There may be normally greater volatility in thinly
traded securities / derivatives contracts than in active
securities /derivatives contracts. As a result of volatility,
your order may only be partially executed or not executed at
all, or the price at which your order got executed may be
substantially different from the last traded price or change
substantially thereafter, resulting in notional or real losses.
1.2 Risk of Lower Liquidity:
Liquidity refers to the ability of market participants to buy
and/or sell securities / derivatives contracts expeditiously at
a competitive price and with minimal price difference.
Generally, it is assumed that more the numbers of orders
available in a market, greater is the liquidity. Liquidity is
important because with greater liquidity, it is easier for
investors to buy and/or sell securities / derivatives contracts
swiftly and with minimal price difference, and as a result,
investors are more likely to pay or receive a competitive price
for securities / derivatives contracts purchased or sold. There
may be a risk of lower liquidity in some securities /
derivatives contracts as compared to active securities /
derivatives contracts. As a result, your order may only be
partially executed, or may be executed with relatively greater
price difference or may not be executed at all.
1.2.1 Buying or selling securities / derivatives contracts as
part of a day trading strategy may also result into losses,
because in such a situation, securities / derivatives contracts
may have to be sold / purchased at low / high prices, compared
to the expected price levels, so as not to have any open
position or obligation to deliver or receive a security /
derivatives contract.
1.3 Risk of Wider Spreads:
Spread refers to the difference in best buy price and best sell
price. It represents the differential between the price of
buying a security / derivatives contract and immediately selling
it or vice versa. Lower liquidity and higher volatility may
result in wider than normal spreads for less liquid or illiquid
securities / derivatives contracts. This in turn will hamper
better price formation.
1.4 Risk-reducing orders:
The placing of orders (e.g., "stop loss” orders, or "limit"
orders) which are intended to limit losses to certain amounts
may not be effective many a time because rapid movement in
market conditions may make it impossible to execute such orders.
1.4.1 A "market" order will be executed promptly, subject to
availability of orders on opposite side, without regard to price
and that, while the customer may receive a prompt execution of a
"market" order, the execution may be at available prices of
outstanding orders, which satisfy the order quantity, on price
time priority. It may be understood that these prices may be
significantly different from the last traded price or the best
price in that security / derivatives contract.
1.4.2 A "limit" order will be executed only at the "limit" price
specified for the order or a better price. However, while the
customer receives price protection, there is a possibility that
the order may not be executed at all.
1.4.3 A stop loss order is generally placed "away" from the
current price of a stock / derivatives contract, and such order
gets activated if and when the security / derivatives contract
reaches, or trades through, the stop price. Sell stop orders are
entered ordinarily below the current price, and buy stop orders
are entered ordinarily above the current price. When the
security / derivatives contract reaches the pre-determined
price, or trades through such price, the stop loss order
converts to a market/limit order and is executed at the limit or
better. There is no assurance therefore that the limit order
will be executable since a security / derivatives contract might
penetrate the pre-determined price, in which case, the risk of
such order not getting executed arises, just as with a regular
limit order.
1.5 Risk of News Announcements:
News announcements that may impact the price of stock /
derivatives contract may occur during trading, and when combined
with lower liquidity and higher volatility, may suddenly cause
an unexpected positive or negative movement in the price of the
security / contract.
1.6 Risk of Rumors:
Rumors about companies / currencies at times float in the
market through word of mouth, newspapers, websites or news
agencies, etc. The investors should be wary of and should desist
from acting on rumors.
1.7 System Risk:
High volume trading will frequently occur at the market opening
and before market close. Such high volumes may also occur at any
point in the day. These may cause delays in order execution or
confirmation.
1.7.1 During periods of volatility, on account of market
participants continuously modifying their order quantity or
prices or placing fresh orders, there may be delays in order
execution and its confirmations.
1.7.2 Under certain market conditions, it may be difficult or
impossible to liquidate a position in the market at a reasonable
price or at all, when there are no outstanding orders either on
the buy side or the sell side, or if trading is halted in a
security / derivatives contract due to any action on account of
unusual trading activity or security / derivatives contract
hitting circuit filters or for any other reason.
1.8 System/Network Congestion:
Trading on exchanges is in electronic mode, based on
satellite/leased line based communications, combination of
technologies and computer systems to place and route orders.
Thus, there exists a possibility of communication failure or
system problems or slow or delayed response from system or
trading halt, or any such other problem/glitch whereby not being
able to establish access to the trading system/network, which
may be beyond control and may result in delay in processing or
not processing buy or sell orders either in part or in full. You
are cautioned to note that although these problems may be
temporary in nature, but when you have outstanding open
positions or unexecuted orders, these represent a risk because
of your obligations to settle all executed transactions.
2. As far as Derivatives segments are concerned, please
note and get yourself acquainted with the following additional
features:-
2.1 Effect of "Leverage" or "Gearing":
In the derivatives market, the amount of margin is small
relative to the value of the derivatives contract so the
transactions are 'leveraged' or 'geared'. Derivatives trading,
which is conducted with a relatively small amount of margin,
provides the possibility of great profit or loss in comparison
with the margin amount. But transactions in derivatives carry a
high degree of risk.
You should therefore completely understand the following
statements before actually trading in derivatives and also trade
with caution while taking into account one's circumstances,
financial resources, etc. If the prices move against you, you
may lose a part of or whole margin amount in a relatively short
period of time. Moreover, the loss may exceed the original
margin amount
Futures trading involve daily settlement of all positions. Every
day the open positions are marked to market based to deposit the
amount of loss (notional) resulting from such movement. This
amount will have to be paid within a stipulated time frame,
generally before commencement of trading on next day.
If you fail to deposit the additional amount by the deadline or
if an outstanding debt occurs in your account, the stock broker
may liquidate a part of or the whole position or substitute
securities. In this case, you will be liable for any losses
incurred due to such close-outs.
Under certain market conditions, an investor may find it
difficult or impossible to execute transactions. For example,
this situation can occur due to factors such as illiquidity i.e.
when there are insufficient bids or offers or suspension of
trading due to price limit or circuit breakers etc.
In order to maintain market stability, the following steps may
be adopted: changes in the margin rate, increases in the cash
margin rate or others. These new measures may also be applied to
the existing open interests. In such conditions, you will be
required to put up additional margins or reduce your positions.
You must ask your broker to provide the full details of
derivatives contracts you plan to trade i.e. the contract
specifications and the associated obligations.
2.2 Currency specific risks:
The profit or loss in transactions in foreign
currency-denominated contracts, whether they are traded in your
own or another jurisdiction, will be affected by fluctuations in
currency rates where there is a need to convert from the
currency denomination of the contract to another currency.
Under certain market conditions, you may find it difficult or
impossible to liquidate a position. This can occur, for example
when a currency is deregulated or fixed trading bands are
widened.
Currency prices are highly volatile. Price movements for
currencies are influenced by, among other things: changing
supply-demand relationships; trade, fiscal, monetary, exchange
control programs and policies of governments; foreign political
and economic events and policies; changes in national and
international interest rates and inflation; currency
devaluation; and sentiment of the market place. None of these
factors can be controlled by any individual advisor and no
assurance can be given that an advisor's advice will result in
profitable trades for a participating customer or that a
customer will not incur losses from such events.
2.3 Risk of Option holders:
An option holder runs the risk of losing the entire amount paid
for the option in a relatively short period of time. This risk
reflects the nature of an option as a wasting asset which
becomes worthless when it expires. An option holder who neither
sells his option in the secondary market nor exercises it prior
to its expiration will necessarily lose his entire investment in
the option. If the price of the underlying does not change in
the anticipated direction before the option expires, to an
extent sufficient to cover the cost of the option, the investor
may lose all or a significant part of his investment in the
option.
The Exchanges may impose/exercise restrictions and have absolute
authority to restrict the exercise of options at certain times
in specified circumstances.
2.4 Risks of Option Writers:
If the price movement of the underlying is not in the
anticipated direction, the option writer runs the risks of
losing substantial amount.
The risk of being an option writer may be reduced by the
purchase of other options on the same underlying interest and
thereby assuming a spread position or by acquiring other types
of hedging positions in the options markets or other markets.
However, even where the writer has assumed a spread or other
hedging position, the risks may still be significant. A spread
position is not necessarily less risky than a simple 'long' or
'short' position.provided by the Exchanges
Transactions that involve buying and writing multiple options in
combination, or buying or writing options in combination with
buying or selling short the underlying interests, present
additional risks to investors. Combination transactions, such as
option spreads, are more complex than buying or writing a single
option. And it should be further noted that, as in any area of
investing, a complexity not well understood is, in itself, a
risk factor. While this is not to suggest that combination
strategies should not be considered, it is advisable, as is the
case with all investments in options, to consult with someone
who is experienced and knowledgeable with respect to the risks
and potential rewards of combination transactions under various
market circumstances.
3.TRADING THROUGH WIRELESS TECHNOLOGY/ SMART ORDER
ROUTING OR ANY OTHER TECHNOLOGY:
Any additional provisions defining the features, risks,
responsibilities, obligations and liabilities associated with
securities trading through wireless technology/ smart order
routing or any other technology should be brought to the notice
of the client by the stock broker.
4. GENERAL
4.1The term ‘constituent’ shall mean and include a
client, a customer or an investor, who deals with a stock broker
for the purpose of acquiring and/or selling of securities /
derivatives contracts through the mechanism provided by the
Exchanges.
4.2The term ‘stock broker’ shall mean and include a stock
broker, a broker or a stock broker, who has been admitted as
such by the Exchanges and who holds a registration certificate
from SEBI. |