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Information on financial instruments

General Classification

The MiFID regulation classifies products as COMPLEX and NON-COMPLEX. However, there is no closed list of products of one kind or another.

However, in a simplified way, we could make the following classification:

Not complex
Variable Income (Shares admitted to trading on regulated markets).
Public debt.
Private Fixed Income (except included in another classification).
Investment Institutions.
Collective in general (IICs).

Complexes
Derivative products.
Structured.
Private Fixed Income that does not have frequent possibilities of sale or liquidation in markets.
Preference shares and Convertible Contingent Debt.
Subordinate titles.
Venture capital entities (Private Equity)
Free investment IICs (Hedge Funds).

1. Equities

The main variable income instrument is shares, which can be defined as those securities representing each of the equal parts into which the capital stock of a company is divided.

They grant their owner (shareholder) economic rights (distribution of benefits in the form of dividends, preferential participation in capital increases, participation in equity resulting from liquidation) and political rights (information, participation and vote in the general meeting of shareholders).

In the actions it is not possible to know with certainty the profitability that will be obtained from the investment. Both the price at which they can be sold and the dividends to be received during their holding period are uncertain.

Risk factor's

It should be noted that risk, as an inherent characteristic of equity securities, means uncertainty, and this implies the possibility not only of obtaining lower returns than expected, but also, and with the same probability, of obtaining higher returns.

The price of a share depends at all times on the valuation that market participants make of the issuing company. Such an assessment depends on various factors. The main ones are expectations about the future profit of society and its growth rate.

Other factors also play a role, such as expectations about different macroeconomic indicators, investor confidence, etc.

For example, expectations of interest rate hikes can lead to price falls because:

- They reduce the risk premium. Fixed income securities, which generally carry less uncertainty for the investor (that is, less risk), offer a higher return, which can trigger a transfer of funds to fixed income.

- They make the cost of financing companies more expensive, so lower future profits are expected.

Naturally, the current value of these expectations varies constantly, and consequently so do the volumes of securities that are offered and demanded at each price. The result is that the prices at which the orders are crossed change throughout the entire trading session, and from one session to the next.

In general, when talking about the risk of a listed company (depending on the source), only the price risk is usually considered, since it is understood that the rest of the risks are already included in it. In this sense, it is possible to calculate with certainty the past risk of a security or an index by measuring volatility. Under different assumptions, it is possible to use the historical volatility of a security to estimate its future profitability, in terms of probability.

Additionally, there could be exchange risk if they are shares issued or whose price is expressed in currencies other than the euro.

2. Fixed income

Fixed income securities comprise a wide range of negotiable instruments issued by both private companies and public institutions. In a generic way, we could define fixed income as that set of financial assets with an established maturity and that offer a fixed return based on a constant interest rate.

Economically, they represent loans that the issuing entities of these financial instruments receive from investors.

Unlike what happens with equities, the holder of fixed income securities has economic rights, but not political rights, since he does not hold any title of ownership over the shares of the Company issuing the financial instrument in question. The most important is the right to receive the agreed interest and the return of all or part of the invested capital on a given date, depending on whether it is simple fixed income or not.

As a general rule, these products are considered non-complex financial instruments, although in those cases in which due to their special characteristics or because it contains a derivative instrument in its structure, the consideration will be that of a complex instrument. Within this last section we could include, by way of example, preferred shares / participations, whose mixed nature (Fixed Income - Variable Income) makes them holders of this consideration.

Risk factor's

As a general rule, the risk for investing in this type of product is also that the return on the investment is lower than initially expected.

Another general principle must also be taken into account, and that is that the prices of financial assets are sensitive to general expectations about the performance of the economy, about the specific behavior of certain sectors or companies, etc.

There are other risks associated with investing in fixed income securities, such as exchange rate risks (risk of variation in currency exchange rates; therefore, it will only affect instruments denominated in currencies other than the euro), and operational or procedural risk. This would derive from the possibility of making mistakes when transmitting purchase or sale instructions to financial entities.

It is the only risk that the investor can completely cancel out, carefully reviewing the orders before transmitting them to the intermediary.

Afterwards, it is necessary to verify that the executions correspond to the instructions transmitted and the market situation, and to carry out an adequate periodic monitoring of the securities accounts.

There are also other important sources of risk that can affect the performance of a fixed income security, which we reflect below:

- Type and price risk. The duration:

The price risk supposes the possibility that, when the investor wishes to sell the asset, its sale price is lower than the purchase price.

In the case of fixed income, this risk is fundamentally linked to the evolution of interest rates, and it manifests itself when the time horizon of the investment is less than the maturity of the security. When an investor acquires an asset with a maturity longer than his own investment period, upon that date he will have to sell it on the secondary market. If during that time interest rates have risen, he will obtain a lower than expected return, and could even register a capital loss. And on the contrary, decreases in interest rates will bring you higher returns than initially expected (this effect is much less in fixed-income securities that pay at variable rates, since periodic payments already usually incorporate fluctuations in interest rates. interest).

Price sensitivity to changes in interest rates is measured by duration, which is the average life of a fixed income security, taking into account the number of outstanding coupons, their distribution and amount, and the rest of the income. to perceive in time. It is a very important concept to estimate the risk that a certain security incorporates. Longer duration means greater risk because, in the event of increases or decreases in interest rates, the price of the product will suffer a greater decrease or rise.

- Credit or insolvency risk:

It is the risk that the issuer of a security will not be able to meet its payments, both coupons and repayment of the principal, or that there is a delay in them. The issuer can be a company, financial institution, a State or a public body.

When the issuer of the (fixed income) securities is a State, the credit risk is called country risk. In Western states it is practically non-existent, although on some occasions there have been unilateral suspensions in the payment of interest on the external public debt issued by developing countries.

In general, in our economic environment, State issues are considered risk-free assets, as long as they are held until maturity (if the securities are sold on the secondary market before amortization, the price that the market is willing to pay at that time).

Any private issuer, regardless of its solvency, incorporates a higher risk than public securities; therefore, higher returns are often required. This differential of return that is requested from private securities with respect to public debt is called the risk premium.

Before investing, it is convenient to take into account the credit quality of the issuer. For this, the ratings (rating) made by specialized agencies can be consulted on the credit quality and financial strength of the issuing companies, States and Public Administrations.

These ratings can be on the issuer, or in the case of private ones, on these and / or each of its issues. In the case of issues in Spain, the ratings can be consulted in the information brochures registered with the CNMV (although the investor must bear in mind that the ratings can be revised, suspended or withdrawn at any time by the rating agency).

The fundamental criterion used to assess the solvency of an issuer is usually its ability to generate profits in the future and, consequently, the ability to meet its payment commitments. On occasions, the solvency of a specific issue may be linked to the offering of additional guarantees (as in the case of securitisations).

- Reinvestment risk:

If the acquired asset has a life shorter than the investment horizon to be maintained, another must be acquired at maturity until that period is completed. Such a situation creates a risk of reinvestment, as it could happen that, on that date, the profitability offered by the assets is lower than that initially obtained at that time.

- Risk of lack of liquidity:

The risk of lack of liquidity is the difficulty that an investor who wants to convert the acquired financial instrument into cash, either because there is no trading or reference market in which he can easily or quickly undo his position, or because in the reference market there is no demand for said instrument in the short term or for the term in which the investor wishes to sell it.

The risk of lack of liquidity refers to a possible penalty in the price obtained by undoing the investment, in the event that it is necessary to carry out the sale quickly. In extreme cases, it could mean that it is impossible to get the money back at the desired time.

As a general rule, financial instruments traded on organized markets are more liquid than those not traded on such markets.

It must be taken into account that the calculation of the total risk is not the sum of all, but a lower figure that takes into account the possible correlations.

Common types of Fixed Income Financial instruments:

- Public debt:

They are fixed income securities, issued by the State, the Autonomous Communities and other Public Bodies. In general, they are very liquid securities with a low credit risk (the public debt issued by the Spanish State has the highest credit rating, by the most prestigious rating agencies).

Depending on the terms and characteristics, there are different types of public debt:

- Bonds and Obligations of the Spanish State. They are the main medium-term (bonds) and long-term (obligations) fixed income instruments issued by the State. These are explicit performance emissions.

Currently, 3 and 5 year bonds and 10, 15 and 30 year bonds are issued. Throughout their life, these assets accrue a fixed interest rate that is paid through annual coupons.

Some long-term public debt issues are carried out under the modality of separable securities or “strips”, in which the principal and each of the coupons to which the original bond entitles can be purchased separately.

- Treasure letters. They are short-term assets (maximum 18 months) issued by the State through the General Directorate of the Treasury. They are always discounted (implicit yield) and are represented exclusively by book entries, without the physical title. The Treasury regularly issues these securities through competitive auctions, as a method of financing from the State. Currently three types of bills are offered depending on their maturity term: 6, 12 and 18 months.

- Regional debt and of other Public Bodies. The Autonomous Communities, local corporations and various public entities issue short-term securities (promissory notes) and long-term. Their characteristics are similar to those of Treasury Bills and government bonds and obligations, respectively.

Information on any issuance of public debt by the State can be obtained on the website of the General Directorate of the Treasury (www.tesoro.es).

- Private fixed income:

It is the set of fixed income securities that are issued by private sector companies.

Issuers are required to edit and register an information brochure with the CNMV each time they carry out an issue of this type, when it is addressed to the general public.

- Company promissory notes. They are zero coupon securities issued at a discount, so their profitability is obtained by the difference between the purchase price and the nominal value of the promissory note that is received on the amortization date. They are short-term, and there are maturities between 3 days and 25 months, although the most frequent terms are 1, 3, 6, 12 and 18 months.

The placement of the promissory notes in the primary market is carried out either through competitive auctions in which the acquisition price is determined, or through direct negotiation between the investor and the financial institution.

They can be traded in AIAF and in the fixed income segments of the Stock Exchanges. Although it is an investment suitable for retailers, it is important to consult the information disseminated by the markets on issues, prices, volumes and cross transactions, and analyze whether the liquidity of the security is adequate for the specific requirements that the investor has raised in this regard.

- Simple Bonds and Obligations. The bonds and obligations issued by companies are medium and long-term securities.

Their characteristics can vary considerably from one issuer to another, and even in different issues of the same company. These differences may be the expiration date, interest rate, coupon periodicity, issue and amortization prices, amortization clauses and other issue conditions, convertibility options, if any, priority of rights in the event of liquidation. , or the guarantees offered, among others.

Thus, we can find simple bonds and obligations, subordinated obligations (which, for the purposes of credit priority, are located behind all common creditors) or indexed, referenced or indexed bonds and obligations (whose profitability is linked to the evolution of a index, basket of shares, etc.). The investor must bear in mind that if the evolution of these references is unfavorable, he could not receive any return or even suffer losses. In these cases, in addition to the risk of the evolution of interest rates that affects all fixed income, the risk of the reference index is assumed.

The placement in the primary market is carried out in accordance with the placement procedure described in the Informative Prospectus and in the summary.

- Subordinated obligations. The economic structure of subordinated bonds is identical to that of simple bonds; the difference lies in its legal situation in the event of bankruptcy or bankruptcy of the issuer. In application of the credit priority rules, the obligations go up The wealthy lag behind common creditors.

This type of issuance is carried out by credit institutions, banks and savings banks, because they are computed as own resources when calculating the solvency ratio required by the Bank of Spain. From the above, it can be deduced that the subordinated debt must have a higher profitability than the simple debt issued by the same entity and at the same term.

On the other hand, there are special subordinated obligations, with different characteristics from the previous ones.

In the first place, they do not have a maturity period, that is, they can become perpetual (the entity is never obliged to repay its principal). Second, the deferral of interest payments is foreseen in the event of losses of the entity. Finally, the investor could lose up to 100% of the amount invested, as well as accrued and unpaid interest, if the entity needs to absorb losses, once the reserves and resources assimilable to capital have been exhausted (such as shares preferred). Regarding the application of the credit priority rules, under a bankruptcy or bankruptcy case, the special subordinated obligations will be placed behind the subordinated debts not classified as special, and in front of the preferred shares.

- Convertible and / or exchangeable bonds. Convertibility implies the possibility of transforming one financial asset into another. Thus, a certain obligation can become a share or other class of obligations.

Convertible or exchangeable bonds give their owner the right to exchange them for shares on a specified date. The difference between exchange and conversion is that, in the first case, the transformation into shares is carried out through the delivery of old shares that are part of the issuer's treasury stock, while in the second, new shares are delivered.

Until the conversion date, the holder receives the interest by collecting the periodic coupons. The number of shares to be delivered for each bond or obligation, the way to determine the prices, as well as the dates of exchange or conversion, are specified in the Informative Prospectus.

When the date of the exchange is reached, the investor has two alternatives:

(i) Exercise the conversion option, if the price of the shares offered in exchange / conversion is lower than their market price, or (ii) Maintain the obligations until the date of the next conversion option or until its maturity.

- Mortgage bonds. They are fixed income securities issued exclusively by credit institutions (banks and savings banks). The mortgage bonds are globally backed by the issuer's mortgage loan portfolio. The law establishes that the volume of mortgage bonds issued by an entity and not expired cannot exceed 90% of the unamortized capital of all the mortgage loans of the entity suitable to serve as coverage.

They are usually medium-term issues and have different modalities in terms of interest rate and repayment conditions. Specifically, the issuing entity reserves the right to early amortize part or all of the issue during its life, in accordance with the provisions of the Law that regulates the mortgage market.

Issuing entities usually give liquidity to these securities, that is, they provide purchase or sale counterpart to investors, provided that the volume of securities they have in their portfolio does not exceed the legal limit of 5% of the volume issued.

Along with the mortgage bonds, it is worth mentioning the territorial bonds, which are backed by the loans and credits granted by the issuer to the State, the Autonomous Communities, local entities and autonomous agencies dependent on them, as well as other entities of a similar nature. European Economic Area.

Holders of both mortgage bonds and territorial bonds have the character of uniquely privileged creditors vis-à-vis any other creditors, the former in relation to all the mortgage loans and the latter in relation to the set of loans granted to public administrations.

- Mortgage or asset securitizations. Securitization is a method of financing companies based on the sale or assignment of certain assets (including future collection rights) to a third party who, in turn, finances the purchase by issuing securities that are placed among investors.

In Spain, the securitization method is as follows: The entity that wishes to finance itself (assignor) sells the assets to a securitization fund, which lacks legal personality and is managed by a management company. In turn, the fund will issue securities, which will be backed by the assets acquired. When the guarantee consists of mortgage loans with certain requirements, assigned by credit institutions, the securities issued are acquired by a mortgage securitization fund (FTH), which issues mortgage securitization bonds. When the guarantee consists of other assets, or mortgage loans that do not meet such requirements, these are acquired by an Asset Securitization Fund (FTA), which will issue promissory notes or securitization bonds.

Among the most relevant aspects of securitization are:

1. The securitization fund is set up as a separate asset, so that the securitized portfolio remains out of reach of the transferor's creditors.

2. The securities issued are backed by the securitized assets and not by the solvency of the assignor. Therefore, in order to increase security in the payment of the securities issued, neutralize the differences in interest rates between the credits grouped in the fund and the securities issued against it, and mitigate temporary flow lags, they are contracted on behalf of the fund financial operations called credit enhancements.

3. The financial risk of the securities issued is always subject to evaluation by a rating agency (rating agencies).

4. The holders of the bonds issued against the fund assume the risk of non-payment of the assets pooled in it.

5. The risk of early redemption of the fund's assets is transferred to the holders of the securities. On each payment date, the bondholders can bear the partial amortization of the bonds.

Despite being issues that generally have a very high rating, they can be difficult for the retail investor to understand. Due to their characteristics, they are usually placed among qualified investors.

- Preference shares. These securities must be issued by an entity resident in Spain or in a territory of the European Union that does not have the status of a tax haven. Preference shares have similarities and differences with both fixed income and equities. Due to their structure, they are similar to subordinated debt, but for accounting purposes they are considered representative securities of the issuer's capital stock, which grant their holders different rights to those of the issuer of ordinary shares (since they lack political rights, except in exceptional cases, and pre-emptive subscription rights).

Its main characteristics are:

1. They grant their holders a predetermined remuneration (fixed or variable), not cumulative, conditional on obtaining distributable profits, by the guarantor company or the consolidable group.

2. In the order of priority of credits, they are placed ahead of the ordinary shares, in equal conditions with any other series of preferred shares and behind all common and subordinated creditors.

3. Preferred shares are perpetual, although the issuer may agree to redeem them after at least five years have elapsed from their disbursement, with prior authorization from the guarantor and the Bank of Spain, where appropriate.

4. They are listed on the AIAF, an organized secondary fixed income market.

Preferred shares are not a traditional fixed income product and, today, some issues have little liquidity. Before hiring them, it is recommended to carefully read the Information Brochure, as well as its summary. Finally, it should be noted that private fixed income can be traded in AIAF and in the fixed income contracting segments of the Stock Exchanges. Each market disseminates current issues, quoted prices, volumes, operations, etc.

3. Collective Investment Institutions (IIC)

IICs are those whose purpose is to raise funds, assets or rights from the public to manage and invest them in assets, rights, securities or other instruments, financial or not, provided that the investor's performance is established based on collective results.

They can have the form of assets without their own legal personality (Investment Funds) or corporate form (SIM, SICAV).

According to their investment vocation, the following types of IICs can be broadly distinguished:

- Fixed income. They invest the majority of their assets in fixed income assets (debentures and bonds, bills, promissory notes, etc.). Those that, within this category, invest only in short-term assets (repayment term less than 18 months) and cannot invest in equity assets, are called money market funds.

- Mixed. They invest part of their assets in fixed income assets and part in equities.

- Of variable income. They invest most of their assets in equity assets. Within this category, subcategories are established, depending on the markets in which it is invested (Europe, USA, etc.), the sectors (telecommunications, finance, etc.) or other characteristics of the securities in which the fund invests.

- Global. These funds have not precisely defined their investment policy and are therefore free not to set in advance the percentages in variable or fixed income in which the fund will invest.

- Guaranteed. They are funds that ensure that, at a minimum, at a certain date, all or part of the initial investment made is preserved.

Within this generic typology, in turn they can present specialties in investment. For example: IICs of funds (they invest in shares of other IICs), main funds (whose participants are not people or entities, but other investment funds, which are called "subordinates"), subordinated funds (they invest their assets in the main fund ), index funds (they replicate a certain variable income or fixed income index), alternative investment IICs (their objective is to obtain a certain return regardless of the evolution of the markets, for which they can use different strategies and resort to a wide range of instruments), etc. On the other hand, it is possible to distinguish between harmonized IICs (“UCITS”) and non-harmonized ones. Harmonized IICs are those that have been authorized in Spain or another State of the European Union under Directive 85/611 / EC, being suitable for marketing in our country since they are duly registered in the registry of institutions of collective investment of the National Securities Market Commission (CNMV).

Harmonized IICs are considered, for the purposes of MiFID, as non-complex instruments; However, a certain type of these products, such as hedge funds (commonly known as “hedge funds”), will nevertheless be considered as complex instruments. Information on this specific type of fund is included in a later section on alternative investments.

Finally, it should be mentioned that there may be exchange-traded funds (ETFs), whose shares are traded on organized secondary markets.

The monitoring of the investment policy of each IIC is controlled by a supervisory authority (in Spain, the National Securities Market Commission), as well as by the information brochure that previously allows the investor to assess the risks of the proposed investments. In general, the supervisory authority also exercises control over the managing entity and the depositary entity.

In all cases, it will deliver to each participant or shareholder, prior to the subscription of participations or shares of the IICs, a copy of the simplified brochure and the latest published financial content report of the institution. In the case of foreign IICs, in addition, as an annex to the simplified brochure, a copy of the Report on the planned methods of marketing in Spanish territory registered with the CNMV will be delivered.

Risk factor's

The nature and scope of the risks will depend on the type of IIC, its individual characteristics (defined in the prospectus) and the assets in which its assets invest.

Consequently, the choice between the different types of IICs must be made taking into account the ability and desire to assume risks on the part of the saver, as well as their investment time horizon.

Knowing the composition of the portfolio and the investment vocation of the fund is fundamental, because it allows the investor to get an idea of the risk that is assumed, according to the investment percentages in each type of financial assets, in euros or in other currencies, in one or more other geographical area, etc.

In general, the following observations can be made:

- Investing in equities, by its very nature, is generally more risky than investing in fixed income, but there may also be losses, and the investor should be aware of this fact (see section Risk factors of fixed income). Equities tend to be more risky because stock prices are more volatile.

- Some IICs, due to their investment policy, may hold securities in their portfolios that incorporate greater credit or counterparty risk.

- Investing in securities from emerging countries entails another additional risk, the so-called country risk, which includes the possibility that political, economic and social events in that country affect the investments held there.

- Investing in assets expressed in currencies other than the euro implies a risk, called currency risk, derived from possible fluctuations in exchange rates.

- On the other hand, IICs that invest in derivative financial instruments (futures, options), may incorporate a higher risk, due to the intrinsic characteristics of these products (for example, leverage). Therefore, it is possible that the losses of the portfolio multiply, although the gains could also multiply.

However, it must be taken into account that some IICs use derivatives exclusively or primarily for the purpose of reducing the risks of the cash portfolio (hedging); In the description of the investment policy, which is included in the prospectus, it should be indicated whether the derivatives will be used for investment or hedging purposes.

- Another circumstance to take into account is that when the IIC invests in securities that are not traded on regulated markets, it is assuming an additional risk, as there is less control over its issuers. Furthermore, the valuation of these assets is more complicated, since there is no market target price available. Special mention should be made of the Free Investment Collective Investment Institutions (or hedge funds), which are characterized by greater flexibility when it comes to making their investments, their debt capacity and less liquidity, being subject to risks of a different nature and degree. those of ordinary collective investment institutions. Its evolution may not be related to the trend of the equity or fixed income markets.

4. Derivative products

These are sophisticated products that in some cases carry the risk of total investment loss. Therefore, to invest in them it is necessary to have certain specific knowledge, both of the products and of the operation of the trading systems, but also to have a high predisposition to take high risks, and the ability to face them.

Investing in derivative products requires knowledge, good judgment, and constant monitoring of your position.

Derivative products can be used for different purposes. On the one hand, they can be used to limit totally or partially the risk of loss of a portfolio or a fund; on the other, they also allow adding risk to an investment (placing a bet on the future value of an underlying asset), in order to achieve higher returns.

A characteristic common to all derivative products is the leverage effect, which defines the relationship between the capital invested and the result obtained. For the same amount, the possible gains or losses obtained from trading with derivatives may be higher than those that would be obtained if the underlying assets were directly traded.

Types of derived products

- Futures. A future is a contract negotiated on an organized market, whereby the parties agree to purchase and sell a specific quantity of a security (underlying asset) at a predetermined future date, at a price agreed in advance. In other words, these are forward contracts whose object is instruments of a financial nature (securities, indices, loans or deposits ...) or commodities (that is, merchandise; they can be agricultural products, raw materials ...).

Trading in futures requires constant monitoring of the position. They carry a high risk if not managed properly. In certain circumstances, part or all of the investment may be lost.

- Options. An option is a contract that carries the right to buy or sell a certain amount of the underlying asset, at a certain price (exercise price), and within the stipulated period.

Options trading requires constant monitoring of the position. They carry a high risk if not managed properly. The value of the premiums can undergo strong variations in a short time. In certain circumstances, part or all of the investment may be lost.

The price of the option depends on different factors: the market price of the underlying at each moment (share, index, obligation, currency ...), the exercise price of the option, the volatility of the underlying, the interest rate without risk, the time remaining to maturity, and other factors that depend on the nature of the underlying (the dividend in the case of options on stocks or indices, or the interest rate differential between currencies, for options on exchange rates) .

In the options it is essential to distinguish between the situation of the buyer and that of the seller. The buyer has the right, but not the obligation, to buy or sell at expiration (depending on the type of option); on the contrary, the seller (or issuer) of the option is obliged to buy or sell if the buyer decides to exercise the right of it.

The option price is what the buyer pays to obtain that right, and is called the premium. When the expiration date arrives, the buyer will be interested or not to exercise it depending on the difference between the price set for the operation (exercise price or “strike”) and the price that the underlying has at that time in the cash market.

- Warrants. A warrant is a negotiable security that incorporates the right to buy or sell an asset (underlying) at a specified exercise price. Therefore, it is a derivative product. Trading in warrants requires constant monitoring of the position. They carry a high risk if not managed properly. The value of the premiums can undergo strong variations in a short time. In certain circumstances, part or all of the investment may be lost.

As in the case of options, the buyer of the warrant has the right, but not the obligation, to buy or sell the underlying on the expiration date. Whether or not you exercise that right will depend on what the price of the underlying is at that time (settlement price), in relation to the exercise price. It is normally settled by differences, giving the holder the difference between the two prices.

The price of the warrant depends on different factors as we have indicated in the case of options.

The main advantage, and at the same time the greatest risk of investing in warrants, is the leverage effect, which generally characterizes derivative products since fluctuations in underlying prices induce higher percentage variations in the value of the premium. In return, a price evolution that does not meet expectations can lead to the loss of the entire investment. Likewise, leverage indicates the number of purchase (call warrant) or sale (put warrant) rights that can be acquired for the price of one unit of underlying asset.

- Certificates. They are derivative products, and as such they carry a high risk. They contain a bet on the evolution of the price of an underlying asset. They can generate positive returns, but if said asset evolves in a manner contrary to expectations, it is possible that no profit will be obtained, or even that part or all of the invested amount will be lost.

Their essential characteristics vary according to the terms and conditions established by each issuer: the underlying on which they are issued and, where appropriate, the practical rules for its substitution, the term, the issue price, the profitability calculation mechanism. , etc.

As these are very heterogeneous securities, to know the specific product it is necessary to consult the brochure and the leaflet of the issue, registered with the CNMV.

They can be issued on a perpetual basis; in this case, subscribers have early repayment options.

The return for the investor consists of the gain or loss derived from the difference between the price of issue or acquisition of the certificate, and its price at the time of its exercise, sale or early redemption.

- Structured Products. Structured products are an instrument (bond or note) issued by an entity, which allows its investor to obtain, within a specified period, a final return linked to the evolution of a specific underlying asset, among which we can highlight: Stock Indices (of any market: national and international); individual shares or baskets of shares (national and international); interest rates (Euribor, Libor ...); commodities (raw materials: oil, gold, ...).

Structured products make it possible to limit the risks in an investment using a combination of derivative products and / or fixed income instruments, designing investment and financing operations tailored to the risk / return profile of the investor or issuer.

Broadly speaking, structured products can be of several kinds, depending on the percentage of repayment of the principal:

1.- Guaranteed products: They allow the recovery of 100% of the invested capital (at maturity you will always receive, at least the investment made). However, they do not necessarily guarantee additional profitability, but rather this will depend on the evolution of the underlying product and the particular conditions of each of the structures.

2.- Non-guaranteed products: Specifically designed to try to optimize the profitability / risk binomial, and which respond to specific market expectations. Among many others, we can mention:

- Coupon products: They efficiently provide attractive coupons in specific market situations, being able to benefit even from latent or even bearish markets.

- Participation products: Their result is directly linked to the behavior of an underlying (indices, securities, etc.) in a more efficient way than investment by separated in the underlying.

- Leverage Products: They allow obtaining similar returns to the underlying, without having to pay the cost thereof, being able to contribute a smaller amount thanks to combinations of options, financing, etc.

Risk factor's

In general, for standard derivative products:

- The risk of insolvency is almost nil, given the existence of secondary markets.

- The liquidity risk is low, as these products are usually traded on organized secondary markets. The risk is much higher in the case of OTC (unlisted) products.

- The exchange risk is essentially linked to the composition of the underlying assets, so that for those issued in euros there is no such risk.

- The risk of volatility is considerable. In addition, it is increased by the leverage effect associated with these products.

- The risk derived from the association of two or more financial instruments could be higher than the risks inherent to each one of the instruments considered individually.

Structured products deserve a separate mention.They may carry a certain level of risk that may include, among others, interest rate risk, related to business circumstances or temporary factors, market and political risk, as well as other risks related to fluctuations in value. of the underlying asset (indices, securities, currencies, etc.) and with the risks of a general nature of the securities markets.

- Credit risk: Risk of non-payment due to changes in the capacity or intention of the counterparty to fulfill its obligations, resulting in a financial loss. Investors bear the entire credit risk of the issuing entity.

- Market Risk: Risk of loss due to adverse movements in prices or market variables that affect the realization value of products. The variable coupon of the instrument is linked to the behavior of the underlying.

- Capital risk: If the instrument acquired does not have the principal protected at maturity, there is a risk of partial or total loss of the initial capital invested. Additionally, the possibility of losing part of the invested capital if the product is sold before the amortization date.

- Interest rate risk: The evolution of interest rates during the investment period may lead to a reduction in the price of the product.

- Exchange risk: Risk of loss due to adverse movements in currency exchange rates, when the currency in which the product is issued is different from that of the investor.

- Option risk: The value of the product, prior to the expiration date, may be affected by a series of factors that influence the price of the option that hedges the instrument for the final payment of the coupon. These factors include: index volatility, interest rates and the time remaining at each moment until the expiration date.

- Liquidity risk: Risk that entails not being able to undo the investment until its maturity or that if the divestment is carried out before maturity, this anticipation will negatively impact the sale price.

- Event Risk: There may be adjustments in the terms of the instrument due to events such as market disruption and changes in tax laws.

- Country Risk: The payment of the instruments may be affected by the economic and political conditions of the issuer's country. The concurrence of country risk can even lead to the loss of part or all of the invested capital. Due to a political or economic circumstance, the reimbursement may even take place in the local currency of the issuer's country instead of the currency in which the investment was made.

5. Alternative investments

Alternative investments are those that are not made through standardized assets (bonds, shares, etc.), and that present unique characteristics in terms of risk / return ratio. In many cases they present a high degree of sophistication.

Here we will refer to two types: hedge funds and Private Equity.

- Hedge funds This term encompasses a variety of funds that invest in very diverse categories of assets, and whose degrees of risk can vary considerably, depending on the different strategies.

As a general rule, a hedge fund is an investment vehicle with the following characteristics:

- The objective of the fund manager is to obtain an absolute return and, therefore, to separate the fund from the general market trend (in general they have a weak correlation with traditional equity and fixed income markets).

- The fund contemplates the possibility of selling titles in short (short selling), which allows creating value when the manager thinks that the price of an asset will fall in the near future (it will sell the asset and buy it again cheaper later) or reduce market risk for the portfolio as a whole, balancing (totally or partially) the amounts of assets bought and sold short.

- The use of the leverage effect is frequent. In this sense, the fund can use loans to finance investments that it considers interesting.

- There is only a private distribution of the fund.

There are multiple classifications of hedge funds. As many as types of strategies. However, two basic ones can be distinguished: “relative value” strategies, which generally have a lower risk profile; “directional” strategies, which carry a higher risk.

Risk factor's

Risk factors specific to hedge funds include:

- The lack of transparency regarding investment policy.

- They are often established in countries where the controls exercised by the authorities are limited or even non-existent (increases the risk, for example, of fraud, non-compliance with the investment strategy, imbalance of the financial structure, etc. ).

- The wide range of products used (among others, derivatives) and the ability to resort to borrowing increases the risk when the manager makes poor decisions.

- They are generally very little liquid. The period between the sale of units in the fund and the corresponding payment can vary from several weeks to several months, depending on the product selected. In this sense, it is possible to distinguish between variable capital funds (which buy back the participation rights at the net book value), and fixed capital funds (in which the issuer does not intervene in the buy-back, and it is up to the investor to negotiate the sale of their shares). participation rights in a secondary market).

- Private equity (venture capital)

Generally, the name “private equity” refers to the capital delivered to companies that are not listed on the stock market. Such capital can be used to develop new products and new technologies, to increase working capital, to make acquisitions or to strengthen the structure of a company's balance sheet.

Venture capital is a subgroup of the private equity family, focused on the start-up or expansion of young companies.

Characteristics include: the long-term investment horizon, the initial period of loss, the restricted liquidity, the entrepreneurial spirit of the investor and the quality of the private equity managers in terms of selection.

This type of investment can be made through common regime companies, or through venture capital entities.

In Spain there are venture capital companies and funds, which invest directly in target companies, and venture capital companies and funds, which invest in other venture capital entities (in the latter case, the diversification involved is a factor that reduces the risk).

Risk factor's

The specific risks of private equity include the following:

- They can generally offer high returns, but they also carry high risks of loss of value, even total loss.

- The generally associated lack of liquidity carries the risk of not being able to sell the assets at a price that reflects the intrinsic value of the participation.

- The difficulty of obtaining an accurate valuation of the company means that the investor runs the risk of making a sale at a price that does not reflect the intrinsic value of the participation.