A Consumerâ€™s Guide to Investments in Financial Products

A consumer’s guide to MiFID

A Consumer’s Guide to Investments in Financial Products

Includes information about Markets in Financial Instruments Directive (‘MiFID’) – a European Directive that gives high level of protection to investors

Malta Financial Services Authority, Notabile Road, Attard BKR3000, MALTAConsumer freephone: 800 74924T: (+356) 2144 1155 | E-mail: [email protected] | www.mfsa.com.mt/consumer

The Malta Financial Services Authority (MFSA) has endeavoured to ensure that all information in this guide is correct. However, no warranty, expressed or implied, is given as to its accuracy and the MFSA does not accept any liability for error or omission. The MFSA cannot recommend firms or tell you whether a particular investment is right for you.

Reproduction of information contained in this guide for the purpose of developing and publishing value-added products is allowed, without prior permission or charge, provided reproduction is accurate, not malicious, and is accompanied by an acknowledgement to the MFSA.

This guide is only a brief overview and not a full description of your rights under MiFID. The contents are merely descriptive and do not constitute legal advice. The MiFID legal texts are available at: http://ec.europa.eu/internal_market/securities/isd/index_en.htm

The main text of this guide has been prepared by the Committee of European Securities Regulators (CESR). CESR is an independent committee of European securities regulators which has contributed to the preparation of the MiFID legal texts. One of the main objectives of CESR is to foster cooperation between its members in the exercise of their core functions, including raising public awareness on financial services issues and investor information. The MFSA is an active member in this committee. More information is available from www.cesr.eu

Published by the Malta Financial Services Authority in August 2008.

Design by Logix Communications Ltd.

Introduction

The Malta Financial Services Authority (MFSA) has endeavoured to ensure that all information in this guide is correct. However, no warranty, expressed or implied, is given as to its accuracy and the MFSA does not accept any liability for error or omission. The MFSA cannot recommend firms or tell you whether a particular investment is right for you.

Reproduction of information contained in this guide for the purpose of developing and publishing value-added products is allowed, without prior permission or charge, provided reproduction is accurate, not malicious, and is accompanied by an acknowledgement to the MFSA.

This guide is only a brief overview and not a full description of your rights under the Markets in Financial Instruments Directive (MiFID). The contents are merely descriptive and do not constitute legal advice. The MiFID legal texts are available at: http://ec.europa.eu/internal_market/securities/isd/index_en.htm

The main text of this guide has been prepared by the Committee of European Securities Regulators (CESR). CESR is an independent committee of European securities regulators which has contributed to the preparation of the MiFID legal texts. One of the main objectives of CESR is to foster cooperation between its members in the exercise of their core functions, including raising public awareness on financial services issues and investor information. The MFSA is an active member in this committee. More information is available from www.cesr.eu

What is MiFID and how does it affect you?

Part 1: Before investing

1.1 Which type of client are you?

1.2 What services might you receive?

1.3 What information will you receive before investing?

Part 2: During and after the investment

2.1 What happens when you give an order to a firm?

2.2 What information will you receive during and after the investment?

2.3 Some important documents

relating to your investment

Part 3: Ongoing requirements

3.1 Conflicts of interest

3.2 Safeguarding your financial assets and money

3.3 Investor Compensation Scheme

3.4 Consumer complaints

Part 4: Some terms and concepts explained

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What is MiFID and how does it affect you?

This guide is for you if you have invested or are planning to invest in financial products. It explains the basics of an important piece of European legislation called the Markets in Financial Instruments Directive (MiFID) and how it affects you when dealing with firms that provide investment services in Europe.

Think about the financial products that you own. You probably have one or more bank accounts, a home loan, a credit card, some shares, a retirement plan, an investment fund… MiFID only applies to some of these products such as shares, bonds, derivatives and units in investment funds. It does not apply to deposits or loans, nor to insurance products. For those products which are covered by MiFID, firms may offer you services such as managing investments on your behalf, giving you advice on investments and buying or selling financial products.

One of the main purposes of the MiFID is to harmonise investor protection throughout Europe. The degree of investor protection that you will receive is directly related to the reliance that you place on the firm and on yourself. For example, if your financial knowledge and experience are low and you are asking the firm to advise you or to take decisions on your behalf you will be afforded the highest degree of protection.

MiFID sets three overarching principles that will apply to firms when they are doing investment business with you. These are:

to • act honestly, fairly and professionally, in accordance with your best interests. This principle protects you when you are dealing with a firm that, as a professional, is in a stronger position than you;

to provide you with appropriate and •comprehensive information which is fair, clear, and not misleading. This will help you to understand products and services so that you can make informed decisions and ensures that you don’t receive biased or confusing information; and

to provide you with services that • take account of your individual circumstances. This is to ensure that your investments correspond to your investor profile and requests.

The structure of this guide is broadly chronological, reflecting the different stages of the investment process and how firms organise and conduct their business with you on a day to day basis. The MiFID principles apply to every step of the firm’s relationship with you.


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Part 1: Before investing


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1.1 Which type of client are you?Before providing you with an investment service, your firm is required to categorise you as a Retail or Professional client. You will normally be categorised as a Retail client, a category which includes the majority of individuals.

As a Retail client you receive the highest level of investor protection. MiFID awards more protection to investors with less investment knowledge and experience (Retail clients), while investors with more investment knowledge and experience (Professional clients) are provided with less protection. Professional clients include banks, governments, investment funds, large companies and exceptionally some individuals.

What if you want to become a Professional client? What if a firm asks you to become a Professional client? What are the consequences?

In limited circumstances you can be treated as a Professional client. You may want to consider this to access products which are not available to Retail clients, or if you want to become a client of a firm that does not do business with Retail clients.

If you want to become a Professional client you need to feel confident that you are capable of making your own investment decisions, capable of assessing the risks that you incur, and do not need a high level of investor protection.

If you choose to be a Professional client, you will lose some of the regulatory protections that apply to Retail clients. The firm will explain this to you. For example, you will generally receive less information and fewer disclosures or warnings on a number of topics.

Before classifying you as a Professional client, a firm will first have to assess whether this category is appropriate for you. The firm must make this assessment to establish that you are capable of making your own investment decisions and you are able to understand the risks involved.

Your firm will be able to categorise you as a Professional client only if you meet at least two of the following conditions:

you frequently carry out transactions;•

you have a large portfolio;•

you have worked in the field of •investment services.

1.2 What services might you receive?In broad terms, you are likely to receive one or more of the following types of investment services:

you are provided with personal •recommendations on investments, products and courses of action (investment advice);

you buy and sell financial products without •investment advice; or

your investments are managed by a firm on •your behalf (investment management).

In this section we will explain the different types of services you may receive from firms and the processes they will follow to deliver the appropriate degree of protection to you.


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Investment advice

When you receive investment advice, you are placing a higher degree of reliance on the investment firm than you would do in other circumstances such as in the case of simple non-advised transactions. You therefore need to have some comfort that the firm understands your individual needs and circumstances so that it recommends the right products for you. MiFID requires a process called the Suitability test, where the firm asks you some questions to reach an understanding of the types of investments that will be suitable for you.

As part of the Suitability test, you are likely to be asked questions about the following:

Your investment objectives • This can include questions about the length of time you wish to hold the investment, your risk appetite and profile, whether you wish to invest for income or growth, keep the capital safe and avoid any risk or accept a high level of risk.

Your financial situation • Information regarding your financial situation may be obtained through questions about matters such as the source and extent of your regular income, your assets, real estate property, any debts you have and other financial commitments.

Your knowledge and experience • Questions regarding your knowledge and experience can include the types of services and products you are familiar with; the nature, volume and frequency of your previous transactions; and your level of education, profession or former profession.

If a firm does not, or cannot, obtain the necessary information to assess suitability, then it cannot make a recommendation. If you provide only limited information, this will affect the nature of the service the investment firm will be allowed to provide to you.

Trading in products without investment advice

(a) The Appropriateness test

As we have described, when a firm is giving you investment advice, it must ensure that its advice is suitable for you.

When you are not receiving investment advice from a firm (or not relying on a firm to manage your investments) you will generally be expected to take a greater degree of responsibility for your decisions. When you want a firm simply to buy or sell an investment without providing you with investment advice

or portfolio management services, a different set of protections apply. These protections are referred to as the Appropriateness test.

The test aims at protecting those who may not understand or be aware of the implications and level of risk involved in a transaction, particularly where the products are ‘complex’ or where you have not taken the initiative to carry out the transaction.

Examples of ‘non-complex’ financial products include:

Shares admitted to trading on a •regulated market

Money market instruments•

Many types of bonds •

Units in certain investment funds •

Examples of ‘complex’ financial products include:

Options, futures, swaps, and other derivatives •

Financial contracts for differences•

Convertible bonds•

Warrants•

These examples are by no means exhaustive and merely indicative.

As part of the Appropriateness test, you are likely to be asked questions about your investment knowledge and experience.

If the firm concludes that you have the •necessary knowledge and experience to understand the risks involved, then the firm may simply go ahead with the transaction.

If the firm concludes that you do not have •the necessary knowledge and experience, or you have not provided enough information to enable it to reach a view, then you will receive a warning from the firm saying that either the firm does not regard the proposed transaction as appropriate or that the information is not enough to enable it to determine appropriateness. If you insist on going ahead with the transaction, you must accept the risk.

(b) Trading in ‘non-complex’ financial products on an Execution-only basis

The Appropriateness test does not apply in the case of some kinds of ‘non-advised’ transactions. This service can be described as Execution-only. The circumstances where the test does not apply are as follows:


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the product involved in the proposed •transaction is what MiFID calls ‘non-complex’; and

you have chosen to contact the firm to •carry out your transaction. This means that you are not responding to a personalised approach to you from the firm which was intended to influence you in respect of a specific product or transaction (for example in certain situations when you are buying shares on line).

You will be warned that the firm is not exercising any judgement on your behalf.

In such cases, you do not have to answer any questions about your investment knowledge and experience, financial situation or investment objectives. The firm may of course ask you questions for other purposes, particularly if you are a new customer.

Investment management

Finally, when your investments are managed by a firm, you are reliant on the firm’s decisions and choices. As the firm will not communicate with you every time it makes an investment on your behalf, it will need to have enough information from you at the outset to enable it to provide you with the required service. To achieve this, as in the case of investment advice above, the firm will carry out a Suitability test. If you do not supply the firm with adequate information it cannot provide the service of investment management to you. If you provide only limited information, this will affect the nature of the services the investment firm will be allowed to provide to you.

The diagram below is a summary of what we have discussed in this section.

You would normally go to an investment firm for one of the following reasons:


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1.3 What information will you receive before investing?All information provided to you throughout your business relationship with a firm should be ‘fair, clear and not misleading’. This principle refers both to the content of the information and to the way it is presented to you.

Your firm should provide you with the relevant information in good time before you invest so that you can make informed decisions. Types of information you will receive before investing include:

Marketing communications: Whether or not you are a client of a firm, you may receive advertisements and other marketing communications issued by a firm. All advertisements and marketing communications have to be presented in such a way that you can identify them as being of a promotional nature.

Contracts: If you are a new Retail client that a firm has taken on for the provision of investment services other than investment advice, you will be asked to agree in writing to a contract which will contain your and the firm’s essential rights and obligations.

Information about the firm: A firm must give you general information about itself, including who regulates it and the services it offers to clients, to help you understand the nature of the services on offer and the risks involved.

Information on investment management: Where you have asked a firm to manage investments on your behalf, you should expect to receive information including a description of the management objectives and the related level of risk, what types of products or transactions may be involved in your portfolio and information about the valuation method and the frequency of valuations of your investments.

Information about financial products: You will receive information explaining the nature, risks and costs of financial products. Such information includes, for example, a description of the products’ risks and whether prices/values may fluctuate. The amount of information will depend on the type of product, its complexity and risk profile.

Information about costs and charges: You will receive information about the direct and indirect costs and charges of a service or product, including any commission charged or paid. This should clearly show you the total costs. Sometimes, however, the precise amount of the

total costs is not available at the time when the information is communicated to you. In such cases, you should instead receive sufficient information to see how the costs are going to be calculated, so that you can verify the total price once it is available.

Inducements

Inducements are payments or non-monetary benefits which a firm receives or pays out as a result of advising on or arranging investments for its customers. Inducements are only accepted if they meet the following criteria: (i) they do not impair the duty of the firm to act in the best interests of the customer, and (ii) they enhance the quality of the service provided to the customer.

The firm is required to disclose to you, as its customer, the essential terms of any arrangements relating to such fees, commissions or non-monetary benefits in summary form. It may, on your request, provide you with additonal information. The aim of this requirement is to enable you to understand and be informed of any incentives which may reward the firm for promoting a particular product or service.

Additional information: Before investing, it would be sensible for you to make sure that you know what the arrangements are if you need to make a complaint about the firm or seek redress, and which investor compensation scheme covers the firm. The firm should give you this information.


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Part 2: During and after

the investment


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2.1 What happens when you give an order to a firm?How is your order handled?

When you instruct a firm to buy or sell a product, your order should be executed promptly, in a timely manner and sequentially (in the order in which it was received by the firm).

If for any reason a firm has a material difficulty in handling your order sequentially, it should notify you.

What is Best Execution?

To complete the purchase or sale of financial products your firm has to execute your orders in such a way as to consistently achieve the best possible result for you. This is referred to as ‘Best Execution’.

In essence, your firm will identify ‘execution venues’ that enable it to obtain Best Execution. Examples of execution venues are stock exchanges, trading platforms, other firms, or even your firm itself (with the firm offering to purchase itself the instruments you are willing to sell or, vice-versa, the firm selling to you the instruments you wish to buy from its own portfolio. However, not all investment firms are licensed to carry out such transactions).

Your firm can achieve Best Execution for your orders by taking a variety of factors into account, such as price, costs of execution, speed and likelihood of execution.

The most important factors a firm will take into account when executing your order are price and total costs (that is, the total financial consideration to be paid by you for a transaction, including the price, all expenses, execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution).

2.2 What information will you receive during and after the investment?What information should you expect to receive from firms that execute your orders?

You will receive information about how your firm achieves best execution for you in practice.

Such information includes:

how the firm determines the factors that are •more important for achieving best execution;

what are the execution venues that the firm •relies on;

a warning that if you give a specific execution •instruction to the firm this will take priority and the firm will not be able to follow its own process for achieving Best Execution for you - it will simply follow your instruction. For example, if you instruct your firm to execute your transaction on a specific market, you may lose the benefit of achieving a better price somewhere else.

What reports will you receive? After you have bought or sold a financial product, your firm will send you a transaction confirmation with essential information such as name of the product, price, date and time and the total sum of commissions and expenses charged.

Where your firm manages your investments on your behalf, the firm should send you periodic reports with information such as the contents and valuation of your investments, the total amount of fees and charges and how your investments have performed during the reporting period.

It is in your interest to retain copies of all documentation you receive from a firm.

2.3 Some important documents relating to your investmentThese are some documents which you will come across when investing.

Retail client agreementThis is also referred to as the Terms of Business Letter. It sets out rights and obligations of the firm and customer, including terms on which the firm will provide services to the customer. As a customer, you should expect to be provided with this document irrespective of the type of investment service.

Fact FindA firm has a duty to request details about you and your finances, and your present and future needs before it provides you with advice or to manage your portfolio. The answers which you provide are recorded in a document called “Fact Find” or “Client Profile”. For your protection this


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document is kept on file and a copy is provided for your records. The firm will rely on this information to be able to assist you. Be honest when replying.

The sort of questions /information that will be asked/requested by your firm may include:

Personal details (which may include age, •children or dependants, occupation);

Summary of assets (such as cash held at •bank, property, other investment);

Summary of liabilities (such as periodic •payments for house loans or other loans, school fees, future commitments, life assurance covers);

Health care;•

Retirement planning arrangements;•

Overall investment objective including your •attitude to risk.

If there are sections on the Fact Find that do not apply to you please write ‘none’ in those sections rather than leaving them blank or just putting a line through them. All information which you provide will be treated as confidential and will only be used for advising you on your financial affairs and for no other purpose.

StatementsA firm is obliged to send you twice-yearly statements of your portfolio. You may request more frequent statements, especially if your portfolio consists of a large number of investments. Your statement should include information about the contents and valuation of the portfolio, including market values, cash balances at the beginning and end of the reporting period, total amount of dividends and interest received during the period, and the total amount of fees and charges. You may request a detailed breakdown of these items.

Contract NotesYou should expect your firm to send you the contract note for a purchase or sale of an instrument no later than the first business day following execution. If confirmation is received by the firm from a third party (for example, another stockbroker), the contract note should be sent to you by no later than the first business day following receipt of confirmation from such third party. The contract note should include information about the trading day and trading time, type of order, venue identification, name of instrument, quantity, unit price and total consideration. You should also have complete disclosure of the commissions and expenses for the transaction, including commission payable to any counterparty.


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Part 3: Ongoing

requirements


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MiFID establishes organisational requirements on how a firm must run its business at all times. Some of these are especially relevant when doing business with you.

3.1 Conflicts of interestFirms should act in accordance with your best interests; to this end they should have in place effective arrangements to prevent conflicts from adversely affecting your interests. Your firm should avoid unduly putting other clients’ interests or the firm’s interests ahead of yours when providing you with a service.

A case of conflict of interest is when the firm is likely to make a financial gain or avoid loss at your expense; or when it has an incentive to favour another client’s interests over yours.

Your firm will also inform you of the key steps it follows to identify and manage conflicts of interests.

When your firm’s arrangements are not sufficient to manage a conflict of interest, then it should disclose to you in a clear manner the nature and sources of this conflict of interest, before it does business with you.

3.2 Safeguarding your financial assets and moneyWhen you place financial assets or money with a firm, the firm will safeguard your ownership rights by having arrangements in place to:

keep them separate from both the firm’s •and other clients’ assets and money;

keep accurate records and accounts and •perform regular reconciliations;

send you a statement at least twice a year •with details of the assets and money held on your behalf.

3.3 Investor Compensation SchemeThe Investor Compensation Scheme is a rescue fund for investors that are clients of investment firms licensed by the MFSA and which have stopped trading and/or have become insolvent. The Scheme can only pay compensation if a licensed firm is unable or likely to be unable to pay claims against it. Generally this occurs when the licensed firm stops trading or becomes insolvent. The Scheme is based on an EU Directive on investor-compensation schemes.

If your claim is accepted by the Scheme, you will be paid 90% of the net loss subject to a maximum of €20,000.

To qualify for compensation you need to satisfy a number of conditions, such as:

You are claiming as an individual or a small •or medium sized company (the law lists a number of entities which are unable to claim compensation).

You are claiming against a firm which is licensed •to provide investment services by the MFSA.

You cannot claim compensation on the basis of:

Market movements resulting in a •decrease in the value of an investment.

Poor investment advice. •

A failed investment that had been •duly executed.

A bankruptcy of a collective •investment scheme.

Inflation. •

A decrease in interest rates. •

More information about the Investor Compensation Scheme is available from www.compensationschemes.org.mt

3.4 Consumer complaintsThe Consumer Complaints Manager at the Malta Financial Services Authority may be able to help if you have a complaint you cannot sort out with your:

bank; •

firm providing investment services; or•

insurance company or insurance agent; and • broker or tied intermediary. •

The Complaints Manager considers each case impartially and on its merits, after discussing it with all parties concerned including yourself.

The service offered by the MFSA is free of charge and is available to retail clients only. The MFSA is not able to give advice about financial or legal matters.

You can also contact the MFSA if you have any query relating to financial services.


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The Consumer Complaints Manager may be contacted as follows:

In writing:Consumer Complaints Manager,Malta Financial Services AuthorityNotabile Road, Attard BKR3000MALTA

By e-mail: [email protected]

By phone: Free phone (+356) 800 74924 or (+356) 2144 1155

You can also use the above numbers to make an appointment.

For more information, please visit the MFSA’s Consumer Complaints website: www.mfsa.com.mt/consumer.

ConclusionWith the publication of this guide, our intention is to raise consumers’ awareness of the changes that are going to affect them as a consequence of MiFID. All the changes and aspects detailed in this guide have been designed to ensure that you, as a consumer, are adequately protected when investing in financial products.

Remember the key principles that firms need to fulfil when dealing with you:

To act honestly, fairly and professionally, in •accordance with your best interests.

To provide you with appropriate and •comprehensive information which is fair, clear and not misleading.

To provide you with services that take •account of your individual circumstances.

My Notes


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Part 4: Some terms and

concepts explained


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This is a glossary of some important words you may have came across in this guide and others which you may need when investing. An asterisk placed before a *word in the definitions indicates that the term is defined further in this glossary.

Best Execution: The obligation of intermediaries to execute customer’s orders at the best price available at the time the trade is entered.

Bond(s): A long-term security in which the issuer agrees to pay the owner the amount of the face value on a future date and to pay interest at a specified rate at regular intervals.

Certificate: The actual piece of paper that is evidence of ownership of a share in a company or stock issued by a government.

Clients’ Account: Intermediaries are required to establish separate bank accounts into which investors’ money available for investment is maintained. *MFSA prohibits a firm from using investors’ money to finance its own activities. It also requires intermediaries to segregate such money from that of its own.

Closed Ended Fund(s): Shares in Closed Ended Funds are not readily transferable on the market especially if they are not listed on a securities exchange. Shares issued by such funds are bought and sold similar to ordinary shares. The capitalisation of these companies remains the same unless action is taken to increase the *issued capital. (See Open Ended Funds)

Collective Investment Scheme (CIS): These are financial products where money from a number of different investors are pooled and then invested by a *fund manager according to specific criteria. The scheme or fund is divided into segments called ‘units’, which are to some degree similar to shares. Investors take a stake in the fund by buying these units – they will therefore become unit holders. The price of a unit is based on the value of the investments the fund has invested in (Net asset value).

Commission(s): The firm’s basic fee for purchasing or selling securities on your behalf. Ask for a copy of the firm’s commission schedule which lists fees or charges you will be required to pay when buying or selling *securities and when opening, operating and closing an investment account.

Consideration: The money value of a transaction (the number of shares multiplied by the price before adding or deducting commission, stamp duty etc.)

Contract Note(s): On the same day as a transaction takes place, a firm sends to the investor a contract note detailing the transaction including full title of the *security, price, stamp duty (if applicable), *consideration, commission, time of deal etc.

Convertible bond: A convertible bond is a type of bond that can be converted into *shares of an issuing company at a specific price within a certain time frame.

Derivatives: A financial instrument whose characteristics and value depend upon the characteristics and value of an underlying financial instrument such as a *bond, *share or currency. Futures and options are examples of derivatives. Professional investors may purchase or sell derivatives to manage the risk associated with the underlying financial instrument, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Derivatives are complicated and risky, and not usually available to retail investors.

Discretionary Portfolio Management: An account in which the customer gives the firm discretion to buy and sell *securities, including selection, timing, amount and price to be paid or received.

Diversification: The practice of putting money into a number of different investments. Investors diversify so they can reduce the risk of their investments losing money. If you put your money into five *shares and five *bonds, for example, you’re practising diversification. In effect, you’re hoping that if one investment is not doing well, it will be offset by most of the other investments, which presumably are making money. Buying a *collective investment scheme is one of the best ways to diversify. Collective investments schemes, because they are a collection of *shares, *bonds or other securities, are typically diversified investments.

Equity: see Ordinary Shares

Eurobond: A long-tem loan issued in a currency other than that of a country or market in which it is issued.

Execution Only: A service in which the firm has no responsibility for advising the investor on whether a particular transaction is suitable or not (for the investor). The firm’s responsibility is limited to executing the transaction on the investor’s instruction.

Execution venue: The place where a transaction takes place, usually a *regulated market (such as a stock exchange).

Fact Find: A document compiled by a firm that details vital facts about an investor’s financial circumstances and investment objectives. The firm will rely on the information contained in a fact find to make appropriate investment recommendations to the investor.

Fund Manager (or Fund Management Company): A Fund Manager is usually a company whose line of business is investing in other companies and entities on behalf of a *collective investment scheme. The Scheme appoints the Fund Manager to buy and sell securities in accordance with the *investment objectives.

Informed decision: A decision which is taken after all details are explained or provided by a firm.

Investment Objective: The goal – such as growth, capital appreciation, or income – that an investor pursues. *Collective investment schemes also have investment objectives which are stated in the *prospectus. The investment objective often determines the type of *securities in which the fund invests, the result expected and the level of risk with which it is associated.

Investment Portfolio: A variety of securities owned by an individual or an entity.

Investment Risk: The possibility of losing money or not gaining value in an investment.

Investor Compensation Scheme: This is the technical term which is used to describe a scheme which provides compensation to retail investors who stand to lose money as a result of the default or bankruptcy of an authorised firm. Payment of claims are limited to a specified amount – that is, investors may receive only a part of the monies invested through a firm who has defaulted or gone bankrupt.

Issued Share Capital: The number of shares on offer to the public at a particular time.

Liquidity: (i) How easily one’s assets can be converted back into cash. For example, money in an account that cannot be withdrawn for five years is not very liquid; (ii) The ability of the market in a particular security to absorb a reasonable amount of buying or selling at reasonable price changes. Liquidity is one of the most important characteristics of a good market.

Listed Security(ies): The security of a company that is traded on a *stock exchange.

Market Price: The last reported price at which the security is sold.


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Maturity Date: The date that a bond comes due and must be paid off.

MIFID: Markets in Financial Instruments Directive.

MFSA: Malta Financial Services Authority (Regulator of financial services in Malta).

Nominee Services: Investors’ money and investments are held in the name of the firm on their behalf.

Non-professional Investor: see Retail Investor

Open-Ended Fund(s): Open-ended funds sell their own new units to investors, stand ready to buy back their old units, and are sometimes listed on a stock exchange. Open-ended funds are so called because their capitalisation is not fixed, they issue more shares depending on how much investors want to invest (in the fund). In Malta, the words SICAV p.l.c. (a French acronym that stands for collective investment scheme with variable capital) which follows a name of a *collective investment scheme denote that the fund is open ended.

Ordinary Share(s): The most common form of share. The holders are the owners of the company and receive dividends which vary in amount in line with the profitability of the company and recommendation of directors. Also referred to as “equity”.

Portfolio(s): A group of shares, bonds or other investments owned by a *collective investment scheme or individual investor.

Preference Share(s): These are normally fixed-income shares whose holders have the right to receive dividends before ordinary shareholders but after debt holders have received their interest.

Professional Investor(s): Professional investors would be experienced in financial matters and therefore capable of investing with minimum or without assistance of intermediaries. (See Retail Investor).

Prospectus: (i) A legal document that describes an investment objective and policies, investment restrictions, officers, directors and expenses of *collective investment schemes; (ii) A document that provides details about a new offering of securities for sale to the public. It gives a detailed financial background of the issuing company, how the proceeds of the securities will be used, and other pertinent information investors will need to make an informed decision.

Protected fund: A type of fund that guarantees an investor at least the initial investment, plus any gains or returns, if held until the contract matures. Typically, these funds would indicate when the fund commences and the term until when it matures. During this period the fund is able to invest in the stock market in the hope of generating a return on your investment, but with the benefit that the initial amount invested is returned on maturity. There may be instances where no return is paid if the stock market is unfavourable.

Ratings: A grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor’s, Moody’s and Fitch provide these evaluations of a bond issuer’s financial strength, or its the ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from “AAA”, which is the highest grade, to “C” (“junk”), which is the lowest grade. Different rating services use the same letter grades, but use various combinations of upper- and lower-case letters to differentiate themselves. To illustrate the bond ratings and their meaning, we’ll use the Standard & Poor’s format: (i) AAA and AA: High credit-quality investment grade; (ii) A and BBB: Medium credit-quality investment grade (iii) BB, B, CCC, CC, C: Low credit-quality (non-investment grade), or “junk bonds”; (iv) D: Bonds in default for non-payment of principal and/or interest.

Regulated Market: A regulated market is an exchange that is authorised as a regulated market by a competent authority. Most *stock exchanges are considered to operate as regulated markets.

Retail Investor (also referred to as Non-Professional Investor): A person who buys or sells securities for his or her own account. A retail investor is dependant on the firm for information and assistance. Therefore the level of protection of a retail investor is higher than that given to a *professional investor.

Risk assessment: The means by which a firm ensures that an informed decision is taken at all times.

Risk: see Investment Risk

Secondary market: When stocks or bonds are traded or resold, they are said to be sold on the secondary market. The majority of all securities transactions take place on the secondary market.

Security(ies): A general term for stocks, *bonds, *collective investment schemes and other products.

Settlement: Conclusion of a *securities transaction when a customer pays a broker/dealer for securities purchased or delivers securities sold and receives from the broker the proceeds of a sale.

Shares: see Ordinary Shares

SICAV: see Open-Ended Fund

Stock Exchange: A market for the sale and purchase of *securities, in which prices are controlled by the laws of supply and demand. Their basic functions is to allow public entities and governments to raise capital by selling securities to investors. They perform valuable secondary functions by allowing those investors to buy and sell these securities, providing *liquidity and reducing the risks attached to investment. Sometimes referred to as Stock Market.

Terms of Business Letter: This is a document which sets out in detail the investment services agreement between the firm and the investor. It should specify, amongst other things, whether the firm will provide investment advice or not, and the type of fees and commissions which the firm will charge. Sometimes referred to as Retail Customer Agreement.

Valuation Statement(s): A report showing the extent to which investments have increased or decreased from all the various gains and losses registered in a specific period.

Warrant: A derivative security that gives the holder the right to purchase *securities (usually *equity) from the issuer at a specific price within a certain time frame.

Documents

A Consumerâ€™s Guide to Investments in Financial Products