What are complex shares?
Shares are publicly traded securities that represent a nominal fraction of ownership in a corporation. So, if you buy shares in, for instance, Microsoft or Tesla, you become a partial owner of that company. A shareholder’s liability can never exceed the amount paid to buy the shares. If a company goes bankrupt, shareholders would be compensated after other obligations have been fulfilled.
Typically, shares are bought and sold on stock exchanges such as the London Stock Exchange or the New York Stock Exchange. However, if shares are traded over-the-counter (OTC) and are not listed on a regulated exchange or Multilateral Trading Facility (MTF), they are considered complex instruments.
An OTC exchange is a broker-dealer exchange which is subject to less regulatory scrutiny than a regular stock exchange; therefore, complex shares do not automatically benefit from the investor protections that regulated markets and MTFs provide. This means there could be less transparency on fees and the underlying companies, market abuse may be more likely, and orderly and efficient trading may not be guaranteed. An OTC market typically has lower liquidity and higher volatility.
What are the risks when trading complex shares?
When trading complex shares, it’s important to be aware of the potential risks. These include:
- Market risk: The risk that investments in complex shares may incur losses due to overall market performance.
- Liquidity risk: Since these shares are not traded on a regular exchange, their pricing relies on indicative bid/offer quotes. With low liquidity stocks, the risk of not being able to close your position at the quoted price is greater than with highly liquid stocks. This could potentially negatively impact the execution outcome, e.g., higher volatility and wider bid/offer spreads, especially during challenging market conditions.
- Volatility risk: The amount of uncertainty or risk related to the size of changes in a security's value. Small-cap stocks traded on OTC markets, for example, typically experience greater prices swings than large-cap stocks traded on a regular exchange.
- Counterparty risk: The risk that the other party in a transaction may not fulfil contractual obligations, leading to potential financial losses.
- Other risks: Depending on specific circumstances, additional risks may arise, such as currency risk for international investments, or regulatory risks (changes in laws or regulations affecting the market or the investment instrument).
How much can you lose trading complex shares?
The maximum loss you face when trading complex shares can vary and is generally determined by the amount invested. You should be aware that the value of your investment can decline, and you may lose the entire invested amount.
Other potential costs/charges when trading complex shares
When you trade complex shares, you should consider the potential additional costs, which may vary depending on the broker or trading platform. These costs can include commissions, spreads, and fees related to specific order types or market access.
It is essential that you review and understand the fee structure provided by the broker or trading platform to assess the impact of additional costs on your trading performance and profitability.