Financial Instruments

Financial instruments are assets that can be traded, or they can also be seen as packages of capital that may be traded.


What are shares? What is a Stock Exchange?

A share is simply a part-ownership of a company. If, for example, a company has issued a million shares, and you own 10,000 shares in it, then you own 1% of the company. As a part-owner of a company, you are investing in the management of the company. You should invest in companies you feel confident are well run.

At its most basic, the stock exchange is a market which brings together people who want to buy shares in a company, and those who want to sell their shares. The laws of supply and demand determine the prices buyers and sellers settle on. The companies whose shares can be bought and sold on the stock exchange are referred to as listed companies.


What are the reasons for investing in shares?

Capital Growth: Over the long term, shares can produce significant capital gains through increases in share prices.

Some companies can also issue bonus shares to their shareholders by way of a bonus issue as another way of passing on company profits or increases in their net worth. A bonus issue occurs when money from a company's reserves is converted into issued capital, which is then distributed to shareholders in place of a cash dividend. A bonus issue does not change the value of your investment.

Many listed companies also make what are called rights issue, where they provide opportunities to their existing shareholders to buy more shares in the company at a discounted rate and without the need to buy through investment firms, thereby saving on fees. Companies do this as a way of raising more capital for expansion, and it provides you with an opportunity to increase your holding in the company at a discounted price if you are confident of its potential.

Dividends: Companies may pay a portion of their profits to their shareholders in the form of dividends. The amount of dividends to be paid to existing shareholders is usually determined and approved at the company's Annual General Meeting. The amount of profit which is not distributed is ploughed back into the company in the form of reserves. Such accumulation of reserves is then used by the company for future projects.

Buying and Selling: Compared to other investments (such as property), shares can be bought or sold quickly through an investment firm. You can, if you so wish, sell part of your holdings in any shares.

Diversifying: As part of your investment strategy, you may have part of your money invested in shares. You may buy shares directly on the stock market or units in collective investment schemes which invest in shares.


Are shares a risky investment?

As with all other investments, prices of shares can go up as well as down. Sometimes, share prices can change substantially as a result of reaction to some news which may affect the listed company. Whenever there is news about a listed company which shows, for example, improvement in its profits, investors tend to react positively by purchasing more shares into the company. As the demand for the shares increase, so too will the price because people would be less willing to sell their holdings in the shares. This is referred to as the law of supply and demand; when demand increases, prices increases. On the other hand, price will start to fall sharply when investors, reacting to negative news about the company, dispose of their holdings as quickly as possible to minimise any dramatic downfall in value of their shares.

There are instances where share prices can fall dramatically. Don't get into a panic, think carefully before selling your shares quickly at a loss. In fact, do not buy or sell on the basis of a change in price only. Your decision to buy or sell should also be based on your analysis of the annual report, changes in management, news about the company etc.

A company is not obliged to pay periodic dividends, even if it has made profits. Hence, you may find that although in one year a company has paid out dividends to its shareholders, the following year that same company may choose, for a number of reasons, not to share part of its profits with its shareholders. Therefore, shares are not suitable if you want a periodic (such as annual) payment of interest. Shares are perhaps more suitable for those seeking capital growth and are prepared to take some risk.

Are all your eggs in one basket? Ask yourself: is this your only investment or your biggest investment (except for your home)? If all your money is going into purchasing shares only or in units of collective investment schemes which invest in shares, you will be taking a really big risk compared with someone who has a variety of other safer products.


What is the best way to obtain information about a company?

You may rely on the advice provided by your investment firm and do your own research when deciding which companies to invest in. The following points provide you with some suggestions regarding sources of information available to the investing public.

Read and listen to the media: This includes newspapers, radio, television and Internet sites. If the company is listed on a Stock Exchange (such as the Malta Stock Exchange) you can look at its share price to obtain an indication of the current value of the share for the company.

Read the company’s annual report: If a company is listed on a Stock Exchange, look at its most recent annual report to see what it has been doing for the past few years and whether it has delivered on its promises. Usually the company will give you these for free or you can get them from your investment firm. The reports will include financial statements, details of the company’s operations over the past year, what the company does, and details of directors and major shareholders of the company. The company’s balance sheet shows what the company owns and what it owes, and its profit and loss statement shows what the company has earned during the year and how these earnings have been distributed.

Look at company announcements: From time to time, listed companies make announcements about major issues related to their operations. For example, an announcement by a listed company could be made when half- and full-year accounts are made public. You can also speak to your investment firm who should be monitoring such announcements.

Read reports by stockbroking firms and investment firms: Many investment firms carry out analysis of various listed companies and such information would be available on their website.

Visit the company’s web site: Many listed companies have their own website which holds large amounts of information about the company’s activities and other valuations including share price, levels of sales, dividend levels, etc. You can also contact the company secretary or someone in the public relations office to send you information about the company.


What is an Initial Public Offering?

An initial public offering (sometimes referred to as IPO or “flotation”) occurs when a company offers its shares to the public for the first time to raise capital. For this purpose, the company issues a prospectus, which is a document that will help you decide whether the company is a suitable investment for you.

A prospectus is required by law to contain all the information you and your investment firm would need so as to make an informed investment decision about the company. It must clearly disclose any risks associated with the investment.

You should not only be interested in what the prospectus says but also think about the matters that it is silent on. Understand the assumptions in the forecasts: Many companies make profit forecasts in their prospectuses which are not met. So you need to read the prospectus critically and decide whether the assumptions made in the prospectus are reasonable. The company should disclose what assumptions were made in preparing those forecasts.


What is the best way to keep track of my shares?

One of the best ways to protect your share investments is to be an involved shareholder in your company. You should be interested in what happens in the company and exercise your powers as a voting shareholder. Keep an eye on your investment because circumstances may change and the market value of your investments will certainly change.

Statements: Listed companies on the Malta Stock Exchange use an electronic transfer and settlement system called CSD (Central Securities Depository). The CSD issues holding statements to shareholders on behalf of listed companies.

You will receive a CSD statement whenever you buy or sell shares in a company. Always keep your CSD statement as proof of your transactions and to help keep track of your shares.

Material sent to you by the company: You will usually receive regular information from the company (e.g. annual report, at least once a year). Read whatever material is sent to you by the company. If the information is late, check with the company.

Receipts and paperwork: Always request receipts from your investment firm and keep all the paperwork about your investments in a safe place, not at your investment firm's office.


What are bonds?

A bond is a debt security. When you purchase a bond, you are lending money to a government or a private corporation or other entity known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it "matures", or comes due.

There are various types of bonds you can choose from: local and foreign government securities, corporate bonds, developing country bonds and eurobonds.

Why invest in bonds?

Most investment firms recommend that investors maintain a diversified investment portfolio consisting of a range of securities in varying percentages, depending upon individual circumstances and objectives. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and to increase their capital or to receive dependable interest income.

What aspects do I have to look for if I choose to invest in bonds?

There are a number of key variables to look for when investing in bonds: the bond's maturity/redemption date, redemption features, credit quality, interest rate, price, yield to maturity and tax status. Together, these factors help determine the value of your bond investment and the degree to which it matches your investment objectives.


A bond's maturity refers to the specific future date on which the investor's principal will be repaid. Bond maturities generally range from one day up to thirty years. Maturity ranges are often categorized as follows:

  1. Short-term notes: maturities of up to 4 years;
  2. Medium-term notes/bonds: maturities of 5 to 12 years;
  3. Long-term bonds: maturities of 12 or more years.

Redemption Features

While the maturity period is a good guide as to how long the bond will be outstanding, certain bonds have structures that can substantially change the expected life of the investment. For example, some bonds have redemption or call provisions that allow or require the issuer to repay the investors principal at a specified date before maturity. Bonds are commonly called when prevailing interest rates have dropped significantly since the time the bonds were issued. Before you buy a bond, always ask if there is a call provision and, if there is, be sure to obtain the yield to call in addition to the yield to maturity. Bonds with a redemption provision usually have a higher return to compensate for the risk that the bonds might be called before maturity.

Your choice of maturity will depend on when you want or need the principal repaid and the kind of investment return you are seeking within your risk profile. Some individuals might choose short-term bonds for their comparative stability and safety, although their investment returns will typically be lower than would be the case with long-term securities. Alternatively, investors seeking greater overall returns might be more interested in long-term securities despite the fact that their value is more vulnerable to interest rate fluctuations and other market risks. Longer term bonds will fluctuate more than short term bonds even though they might have higher yields to maturity.

Credit Quality

Bond choices range from the highest credit quality, which are backed by the full faith and credit of the issuing entity (such as the government), to bonds that are below investment grade and considered speculative.

When a bond is issued, the issuer is responsible for providing details as to its financial soundness and creditworthiness. This information is contained in a document known as an offering document or prospectus. If your intermediary is not able to provide you with a copy of this document, you should request a summary of the main features attached to the bond which you intend to purchase. Such features would normally include: information about the issuer, name of the bond (including coupon, date of maturity), current price, accrued interest (if any), frequency of coupon payments, redemption information, ratings.

Make sure that all information given to you verbally is put down in writing for future reference.

Sovereign Risk

Some investors, including Maltese, are tempted by the prospect of earning high yields by investing in emerging country bonds. However, although the annual or semi-annual coupon payment can be quite high, most investors tend to discount the underlying country or sovereign risk. It is risk inherent in holding shares, bonds or other securities whose fortunes are closely allied with a particular country. If the country goes into an economic downturn, or its debt is downgraded (see next question), or the international investor sentiment just turns against it, your investments may well lose value. Generally speaking, sovereign risk is more of a problem for investors in emerging markets than in developed economies.

Of course the very volatility of emerging markets also presents opportunities, although retail investors should exercise extra caution when investing in such securities.

But how can I know whether the company of goverment entity whose bond I am buying will be able to make its regularly scheduled interest payments in 5,10,20 or 30 years time?

You may have heard your intermediary mention the term "triple A" or simply an "A". These are called ratings. Each international bond is usually given a rating by a rating agency. These agencies, such as Standard and Poor's or Moody's, give these ratings when they are issued and monitor developments during the bond's lifetime. Such agencies maintain research staff that monitor the ability and willingness of the various companies, governments and other issuers to pay their interest and principal payments when due. Your investment firm can supply you with current research on the issuer and on the characteristics of the specific bond you are considering.

Each of the agencies assigns its ratings based on an in-depth analysis of the issuer's financial condition and management, economic and debt characteristics, and the specific revenue sources securing the bond. The highest ratings are AAA (Standard & Poor's) and Aaa (Moody's). Bonds rated in the BBB category or higher are considered investment-grade; securities with ratings in the BB category and below are considered below investment-grade.

It is extremely important to understand that, for any single bond, the high interest rate that generally accompanies a lower rating is a signal or warning of higher risk.

Credit Ratings

Credit Risk Moody's Standard & Poor's
Investment Grade
Highest Quality Aaa AAA
Highest Quality (Very Strong) Aa AA
Upper Medium Grade (Strong) A A
Medium Grade Baa BBB
Non Investment Grade
Somewhat Speculative Ba BB
Speculative B B
Highly Speculative Caa CCC
Most Speculative Ca CC
Imminent Default C D
Default C D

Interest Rate

Bonds pay interest that can be fixed, floating or payable at maturity. Most bonds carry an interest rate that stays fixed until maturity and is a percentage of the prinicpal amount. Typically, investors receive interest payments semi-annually. For example, a EUR1,000 bond with an 8% interest rate will pay investors EUR80 a year, in payments of EUR40 every six months. When the bond matures, investors receive the full face value of the bond, that is EUR1,000.

But some sellers and buyers of bonds prefer having an interest rate that is adjustable, and more closely tracks prevailing market rates. The interest rate on a floating-rate bond is reset periodically in line with changes in a base interest-rate index.

Some bonds have no periodic interest payments. Instead, the investor receives one payment at maturity that is equal to the face value of the bond plus the total accrued interest, compounded semi-annually at the original interest rate. Known as zero-coupon bonds, they are sold at a substantial discount from their face amount. For example, a bond with a face amount of EUR20,000 maturing in 20 years might be purchased for about EUR5,050. At the end of the 20 years, the investor will receive EUR20,000. The difference between EUR20,000 and EUR5,050 represents the interest, based on an interest rate of 7%, which compounds automatically until the bond matures.


The price you pay for a bond is based on a whole host of variables, including interest rates, supply and demand, credit quality, maturity and tax status. Newly issued bonds normally sell at or close to their face value. Bonds traded in the secondary market, however, fluctuate in price in response to changing interest rates. When the price of a bond increases above its face value, it is said to be selling at a premium. When a bond sells below face value, it is said to be selling at a discount.


Yield is the return you actually earn on the bond, based on the price you paid and the interest payment you receive.

The yield to maturity tells you the total return you will receive by holding the bond until it matures or is called. It also enables you to compare bonds with different maturities and coupons. Yield to maturity equals all the interest you receive from the time you purchase the bond until maturity (including interest on interest at the original purchasing yield), plus any gain (if you purchased the bond below its par, or face value) or loss (if you purchased it above its par value).

You should ask your intermediary for the yield to maturity on any bond you are considering purchasing. Your intermediary will also help you understand better how the yield to maturity is calculated.

Market Fluctuations: The Link Between Price and Yield

From the time a bond is originally issued until the day it matures, its price in the marketplace will fluctuate according to changes in market conditions or credit quality. The constant fluctuation in price is true of individual bonds, and true of the entire bond market, with every change in the level of interest rates typically having an immediate effect on the prices of bonds.

When prevailing interest rates rise, prices of outstanding bonds fall to bring the yield of older bonds into line with higher-interest new issues. When prevailing interest rates fall, prices of outstanding bonds rise, until the yield of older bonds is low enough to match the lower interest rate on new issues. Because of these fluctuations, you should be aware that the value of a bond will likely be higher or lower than both its original face value and the purchase price if you sell it before it matures.

Assessing Risk

Virtually all investments have some degree of risk. When investing in bonds, it is important to remember that an investment's return is linked to its risk. The higher the return, the higher the risk. Conversely, relatively safe investments offer relatively lower returns.

Secured vs Unsecured

Secured bonds are those bonds which are backed by a specific asset or revenue stream. If the company which issued the bonds becomes financially insolvent, the secured bondholders have first access to that asset, or to revenue provided by the specific asset. If this occurs, investors are able to collect at least a portion of what they are owed

When bonds are unsecured, this means that repayment of capital is not collateralised by a security on specific assets of the issuer in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. These bonds are not backed by anything but your trust and the company's commitment to pay.

Subordinated vs Unsuboridinated

In the case of bankruptcy or insolvency holders of unsubordinated bonds can claim access to collateral or earnings before other debt holders, such as the holders of junior debt.

On the other hand Subordinate bonds are bonds for which banks and companies are comprehensively liable with their capital assets. The holders of such bonds will not be treated as preferred creditors; in the case of insolvency, senior creditors take preference in having their claims satisfied from the debtor's assets.

Bail-in-able Bonds

Bonds are a form of debt and as such, they rank higher than equity. This gives them a better claim to get their money back when business turns sour since the equity holders have an obligation to repay their creditors. Following the financial crisis, when governments injected hundreds of billions into banks, most banks bondholders were left untouched – even those holding subordinated, or junior, debt.

The Bank Recovery and Resolution Directive (BRRD), provides resolution authorities with a set of resolution tools and powers. These include the power to sell or merge the business with another bank, to set up a temporary bridge bank to operate critical functions, to separate good assets from bad ones and to convert into shares or write down the debt of failing banks (bail–in). In addition, bank capital instruments must be written down or converted when the relevant authority determines that the bank is no longer viable, which may occur before the point of resolution.

These unsecured bonds issued by credit institutions and investment firms with specific features that enable them to be converted into shares or written down at a certain trigger event or at the discretion of the supervising authority are therefore called bail in able bonds.

Clients should be aware that as holders of these unsecured liabilities they do not benefit from the preferred creditor status as they are not depositors, who are eligible for deposit guarantee scheme coverage.

Firms should give fair, clear and not misleading information about the risks of financial instruments subject to the resolution regime and the procedures for the suitability/appropriateness assessment should carefully consider the nature and characteristics of the instruments, including their complexity, possible returns, risks and liquidity.

Collective Investment Schemes

What is a Collective Investment Scheme?

These are financial products where money from a number of different investors is 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 unitholders. The price of a unit is based on the value of the investments the fund has invested in. Collective investment schemes may have different fee structures, make sure you understand how you will be charged before you invest as charges may have a major impact on the performance of your investment.

How do Collective Investment Schemes vary from one to another?

Collective investment schemes can invest in shares, bonds, deposits and other investments. Usually, fund managers select the investments they think will do best and switch from one to another as market conditions change. However, fund managers are obliged to follow prescribed investment criteria which are set out in the prospectus which is approved by the regulator.

There is a wide variety of funds

  • Money market - They invest in deposits and short-term securities. These are low risk but cannot be expected to give high returns over the long-run.
  • Bond Funds - invest in corporate bonds, government bonds and/or similar securities. They are medium to low risk and usually aimed at providing income rather than growth. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.
  • Equity Funds - generally involve more risk than money market or bond funds, but can also offer the highest returns. A fund's value (Net Asset Value) can rise and fall quickly over the short term, but historically shares have performed better over the long term than other type of investments. Not all equity funds are the same. For example, growth funds focus on stocks that may not pay a regular dividend but have the potential for large capital gains.
  • Balanced Funds - invest in a combination of shares and bonds, ensuring diversification. They are suitable if you want a medium-risk investment. They can be aimed at providing income, growth or both.
  • Tracker - unlike the other funds listed here, there is no fund manager actively choosing and switching securities. Instead, the investments are chosen to move in line with a selected stock index, such as the FTSE 100, an index of the share prices of the 100 largest companies (by market capitalisation) in the UK which is updated throughout the trading day. As there is no active management, charges are usually lower.
  • Specialist - invest in particular sectors, such as Japan, or particular types of shares, such as small companies. Suitable only if you are comfortable with relatively higher risk.
  • Sector - invests in a specific sector such as Retail or Telecommunication Services.

How do I earn money from an investment in a Collective Investment Scheme?

You can earn money from your investment in three ways:

  1. A fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its unit holders nearly all the income it has earned in the form of dividends. Usually, these funds are called "Distribution Funds".
  2. The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds may choose to distribute these capital gains (minus capital losses) to investors.
  3. If a fund does not sell but holds on to securities that have increased in price, the fund's value (Net Asset Value) increases. The higher net asset value reflects the higher value of your investment. If you sell your units, you make a profit (this also is a capital gain).

Usually funds will give you a choice: it can send you payments for distributions and dividends (such funds are called "Distributor" funds), or you can have them reinvested in the fund to buy more units (called "Accumulator" funds).

What should I look for if I decide to invest in Collective Investment Schemes?

Past performance is not as important as you might think, especially the short-term performance of relatively new or small schemes. As with any investment, a fund's past performance is no guarantee of its future success. That said, however, volatility of past returns is a good indicator of a fund's future volatility. Over the long-term, the success (or failure) of your investment in a fund will depend on a number of other factors.

Read the fund's prospectus and shareholder reports, and consider these tips

Check total return 

You will find the fund's total return in the financial highlights, usually in the front of the prospectus or the annual financial statements published by the fund. Total return measures increases and decreases in the value of your investment over time, after subtracting costs (you will usually find it written as "Net Return"). When expressed as a percentage, net return for an indicated period is calculated by dividing the change in a fund's Net Asset Value, assuming reinvestment of all income and capital gains distributions, by the initial price.

See how the net return has varied over the years. The Financial Highlights show yearly total return for the most recent five or ten year period. Looking at year-to-year changes in total return is a good way to see how stable the fund's returns have been.

Scrutinise the fund's fees and expenses

Funds charge investors fees and expenses, which can lower your returns. For example, if on an investment of €5000, you have to pay a front-end fee of 2% (€100), the actual amount invested would be €4900. This means that if you wish to realise an adequate return, the fund would need to achieve a return which would at least get back the fee that you paid initially. Find the section in the fund's prospectus where the costs are laid out. You can use the information in this section to compare the costs of different funds.

Transaction related fees before Entry fee.

Usually, fees fall under two main categories:

  • Transaction related fees (paid when you buy, sell, or exchange your units), and
  • ongoing expenses (paid while you remain invested in the fund).

Entry fee: A fee you pay when you buy units. This type of fee reduces the amount of your investment in the fund.

Exit fee: A fee you pay when you sell your units. It usually starts out at a specified amount for the first year and gets smaller each year after that until it reaches zero (say, in year four of your investment).

Ongoing expenses

The section about fees tells you also the kind of ongoing expenses you will pay while you remain invested in the fund. The relevant section shows expenses as a percentage of the fund's assets, generally for the most recent fiscal year. Here, the section will tell you the management fee (which pays for managing the fund's portfolio), along with any other fees and expenses.

Some funds also charge a performance fee. This annual fee, which is usually paid to the adviser of the fund, is applied by applying a percentage to the difference in the performance of the fund during the year compared to the performance with the previous year. The calculation of the fee may not be very straight forward and you will need the assistance of your intermediary if you want to know more about how this fee is calculated. In essence, this fee gives an incentive to the adviser of the fund to select the best securities on the market in which to invest. A better performance will mean that the adviser gets a larger share of the profits which the fund has generated.

A difference in expenses that may look small to you can make a big difference in the value of your investment over time.

Many funds allow you to switch your units for units of another sub-fund within the same collective investment scheme. The fee section will tell you if there are any switching fees.

What other sources of information should I consult?

Read the sections of the prospectus that discuss the risks, investment goals, and investment policies of any fund that you are considering. Funds of the same type can have significantly different risks, objectives and policies.

You can get a clearer picture of a fund's investment objectives and policies by reading its annual and semi-annual reports. You should be receiving these reports at least annually, if not, please contact your investment firm or the fund manager to send you these reports.

One final hint: Generally the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes; shares, bonds and cash, rather than on the particular securities you hold. When choosing a collective investment scheme, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.

Complex Instruments

Risks of investing in complex products

Key messages

  • If you do not understand the key features of the product being offered, or the key risks involved, do not invest. Instead, consider seeking professional advice on what investment is suitable for you.
  • Be aware that sometimes the name of a product may not reflect the features of the product. Be wary of promises of "high", "guaranteed", "hedged" or "absolute" returns. These promises often turn out to be misleading.
  • Be careful if you need to access your money before the product is due to pay out.
  • Before you invest, understand what the total costs are. The cost of an investment will impact the return you are likely to achieve. Also, there may be similar, less complex products - with lower costs available.

Why are we issuing this warning?

During this period of historically low interest rates, investment firms have responded to the search for investment returns by offering complex investment products. Some of these products are designed to allow retail investors access to different types of assets (equities, bonds, commodities) and investment strategies that were previously only available to professional investors.

Complex products are often aggressively marketed. Advertisements sometimes use enticing slogans such as "absolute return", "guaranteed", and "hedged growth", or advertise returns far in excess of deposit account returns that are currently available from banks. These headline promises often turn out to be misleading, or mean something different to what you may have understood.

Investors often do not understand how these complex products work. More specifically, the associated risks, costs, and expected returns are in many cases not immediately apparent or easy to understand.

Some complex products require a high level of knowledge to evaluate and assess the risks. They also need active management and monitoring over time. Active management and monitoring is often too time consuming, impractical and difficult for retail investors. You should consider these difficulties when thinking about investing in complex products.

Organisations that are classified as professional investors should consider whether they are adequately equipped and have the expertise to perform the necessary level of active management and monitoring.

What "complex products" are we talking about?

Complexity is a relative term. Many elements can make a product difficult to understand. A product is likely to be considered complex if the product:

  • is a derivative, or incorporates a derivative (a derivative is a financial instrument where the value is based on the value of another financial instrument, or of some other underlying financial asset or index, such as foreign currencies or interest rates they are often included in a financial product to produce or enhance a certain investment strategy, as well as to hedge, or offset, certain risks);
  • has underlying assets or indices that are not easily valued, or whose prices or values are not publicly available;
  • has a fixed investment term with, for example, penalties in case of early withdrawal that are not clearly explained;
  • uses multiple variables or complex mathematical formulas to determine your investment return;
  • includes guarantees or capital protection that are conditional or partial, or that can disappear on the happening of certain events.

The following specific products are examples of products that should be considered as complex: asset backed securities ; types of bonds such as convertible or subordinated; certificates; contracts for difference (CFDs); credit linked notes; structured products; and warrants.

What are the main risks and disadvantages of investing in complex products?

Although complex products can provide benefits to you, there are certain risks and potential disadvantages involved in investing in complex products. These risks and disadvantages may not be apparent, or easy to understand. You need to be fully aware of these risks and ensure you sufficiently understand the key features of a product in order to make informed investment decisions.

Liquidity risk

Liquidity risk is the risk that you will be unable to sell the product easily if you need to do so before the end of its term. If your product is not liquid, which is often the case for complex products, it is highly probable that you will have to sell the product at a heavy discount from purchase price (and you will therefore lose money) or will not be able to sell it at all.

Leverage risk

"Leverage" is a term used to describe ways or strategies to multiply potential gains and losses, such as by borrowing money or using products like deriva-tives. It may be suggested to you that you invest with leverage in order to possibly achieve higher returns, but you must keep in mind that leverage can easily multiply losses too.

Market risk

Market risk is the day-to-day risk of losses arising from movements in market prices. Complex products can expose you to several market risks because they are often designed to invest in separate under-lying markets (for example, in shares, interest rates, exchange rates, commodities).

Credit risk

Credit risk is the risk that the issuer of the product or a firm it deals with defaults and is unable to meet its contractual obligations to repay your investment.

Certain instruments are rated by credit rating agencies. If you are considering investing in a rated instrument, you should ensure that you understand what the ratings mean. A low rating will tell you that there is a higher risk of the issuer defaulting, and you will not get back the money you invested. A high rating indicates that the chances of an issuer defaulting are much lower, but it does not necessarily mean that the investment will provide the return you expect. You should also be aware that the rating of an issuer may change during the lifetime of the product.

Cost of complexity

Complex structures within a product can mean the product has a higher cost because you are paying for the product’s underlying features. Also, fees and commissions are usually built into the structure of the products, and are therefore not readily apparent.

Contracts for Difference (CFD)

A Contract for difference (CFD) is an agreement between a ‘buyer’ and a ‘seller’ to exchange the difference between the current price of an underlying asset (shares, currencies, commodities, indices, etc.) and its price when the contract is closed.

CFDs are leveraged products. They offer exposure to the markets while requiring you to only put down a small margin (‘deposit’) of the total value of the trade.

They allow investors to take advantage of prices moving up (by taking ‘long positions’) or prices moving down (by taking ‘short positions’) on underlying assets.

When the contract is closed you will receive or pay the difference between the closing value and the opening value of the CFD and/or the underlying asset(s). If the difference is positive, the CFD provider pays you. If the difference is negative, you must pay the CFD provider.

CFDs might seem similar to mainstream investments such as shares, but they are very different as you never actually buy or own the underlying asset.

We are including a practical example on how CFDs work compared to investing in a share.

Option 1: Buying Common XYZ Stocks

  • The Price of XYZ's stock is $150
  • Investor A intends to buy 1000 stocks
  • He will invest $150,000

Option 2:  Buying CFDs on XYZ Stocks

  • The Price of XYZ's Stock CFD is the same with the underlying asset ($150)
  • Only a margin of the Nominal Value of the Stock’s Value is required (10%)
  • What is the Cost of buying 1000 CFDs? It would be $15,000

Best Case Scenario: XYZ's new phone hits record sales and by the end of the week its stock rises 10%!

Who invested under Option 1:  New price of stock is $165.  Profit of each stock is $15…

Who invested under Option 2:  New price of CFD is $165.  Profit of each CFD is $15…,

The total profit made would be $15,000 under each option however percentage wise it would be 10% of the capital invested under Option 1 and 100% under Option 2.

Worse Case Scenario: XYZ's new phone debut disappoints and the stock’s price by the end of the week is down 10%!

Who invested under Option 1: New price of stock is $135.  Loss on each stock is $15

Who invested under Option2:  New price of CFD is $135.  Loss on each CFD is $15

The total loss made would be $15,000 under each option however percentage wise it would be loss of 10% of the capital invested under Option 1 and 100% under Option 2.

Key Message

CFDs are complex products and are not suitable for all investors.

Don’t use money you can’t afford to lose. You could lose much more than your initial payment.

You should only consider trading in CFDs if: 

  • you have extensive experience of trading in volatile markets,
  • you fully understand how they operate, including all the risks and costs involved
  • you are aware that the greater the leverage, the greater the risk, 
  • you understand that your position can be closed whether or not you agree with the provider’s decision to close your position,
  • you have sufficient time to manage your investment on an active basis.

Exchange Traded Funds (ETFs)

What are exchange Traded funds?

Exchange Traded Fund (ETF) are similar to collective investment schemes. ETFs invest in a number of assets, for instance shares, bonds or commodities such as gold. ETFs can be bought and sold like shares through your financial intermediary. What makes it different is that an ETF would try to track the value of a share index (such as the FTSE 100 which represents the top 100 companies on the UK stock exchange). ETFs may offer an opportunity to diversify an investment portfolio, possibly at a lower fee than a traditional collective investment scheme (where the underlying assets would need to be actively managed according to pre-determined parameters).

Most ETFs buy the underlying shares and other assets that they are trying to track. These are known as standard or 'physical ETFs' and you will usually own units or shares much like a traditional collective investment schemes. The main investment risk for this type of ETF is that the performance of the underlying shares or other assets which the investment is trying to match varies continuously.

Another type of ETF is known as 'synthetic ETF'. These ETFs may or may not directly own the underlying shares or other assets and use complex products called derivatives to track their performance, before subtracting any applicable fees. An important warning: Synthetic ETFs are very complex and risky products and one should therefore be aware of all possible risks prior to investing in such products.

Are there features particular to ETFs I should know prior to investing?

Although ETFs may appear simple and transparent, they can be complex investments. One important thing to note is that their values fluctuate constantly in line with the underlying asset they are trying to track. There might also be the possibility of an error in the pricing of physical ETF. This happens when the ETF does not exactly follow the price of the index or investments they are designed to track. This 'tracking error' may be caused by fees, taxes (both local and foreign), and other external factors.

Before acquiring an ETF, check that the price you have been quoted from your intermediary matches what the ETF issuer says its assets are worth (the 'net asset value', or NAV). Some ETF issuers may also have a website and publish their estimated NAVs. Therefore, the price you see on a website or given by an intermediary is an estimate, the price at which you buy or sell may vary from this estimate.

While ETFs have become known for their low costs, management fees vary and there are other costs to consider. For example, management fees for some physical or synthetic ETFs may be higher than the fees for an equivalent (unlisted) index fund. There might also be a brokerage fee which will be charged every time you buy or sell ETFs. There might also be other fees, ask your intermediary about them or, better still, check for such fees on the documentation you should be given about the ETF.

Some physical and synthetic ETFs offer exposure to risky investments such as small startup companies, underlying investments in emerging markets or commodities that may be harder to sell. This therefore means that some ETFs may be riskier than others due to the risk attached to their underlying investments. If the ETF tracks assets denominated in a foreign currency, such as shares issued in US dollars, a change in the value of the Euro (or your local currency if different) or dollar may also affect the value of your investment thus increasing the overall risk.

Some ETFs might not trade daily or on a regular basis due to the illiquidity of the underlying assets and therefore this may limit your access to the money invested in the fund.

Most ETFs are 'passive' investments that simply seek to follow a market index (up or down), rather than trying to outperform it. This means you have no protection from investment losses when the market falls. Some ETFs may however impose an upper or lower maximum threshold to which the investor will be exposed to. This will therefore limit your losses but also your gains.

Questions you should ask prior to investing

  • Do you understand the risks involved, and are you comfortable with them?
  • Are the underlying assets liquid (easily bought and sold), or are they less liquid investments (such as property)?
  • Are derivatives, hedging or speculative techniques used by the ETF? If the answer is yes, the risks may be higher.
  • What are the fees being charged and how will these be paid? Are there any additional fees should I decide to buy or sell? Can these be changed?
  • What does the documentation about the ETF say about "returns"? Are returns guaranteed or promised? Are such returns net or gross of tax? If so what is my position?
  • These products are traded on foreign stock exchanges. Am I comfortable with the fact that different rules and less protection may apply? There might also be a currency risk to consider.
  • Am I putting all my eggs in one basket? What is the proportion invested in the ETF compared to my entire investment portfolio?

Finally, before you invest in any ETF it is important that you do your homework well and get advice from a trusted, licensed financial adviser. If you don't understand how the investment works or you have not been given sufficient documentation which you can easily understand, don't invest!

Forex Trading

Foreign Exchange (FX or forex) trading is when you attempt to generate a profit by speculating on the value of one currency compared to another.

Foreign currencies can be traded because the value of a currency will fluctuate, or its exchange rate value will change, when compared to other currencies.

Forex trading is normally conducted through 'margin trading', where a small collateral deposit worth a percentage of a total trade's value, is required to trade.

Financial regulators in the EU have also noticed an increase in unauthorised firms offering transactions, or platforms to trade, in currency derivatives in the Forex market, such as 'contracts for difference' [CFDs], 'FX forwards', and 'rolling spot contracts'.


Forex trading is complex and risky. It involves predicting movements in currencies. Trading in international currencies requires a huge amount of knowledge, research and monitoring.  If YOU:

  • Don't know how forex works in detail; AND

  • Don't have time to do research and monitor your trades; AND

  • Don't understand the online platforms used for trading and their functionality; AND

  • Have not read or fully understood the product disclosure statement and DISCUSSED the risks with your financial adviser; AND

  • Don't to lose more than the amount you invested

Then steer clear from even thinking about Forex Trading.

Structured Products

Structured products can be any one of a wide range of investments and can offer income, capital growth, or a combination of both. Most structured products tend to be open to new investment for a short period of time. Your money will then usually need to be tied up for between one and ten years. Some structured products offer full capital protection, but others offer partial or no capital protection.

Structured products are often complicated. You should seek professional advice if you are in any doubt about the potential risks and returns involved.

You could lose some or all of the money you put into these products, so make sure you understand the risks before investing.


How do they work?

Structured products offer returns based on the performance of underlying investments. Many products are linked to a stock market index such as the FTSE 100, Nasdaq, or EuroStoxx50. The underlying investments may involve different firms based in various countries.

A typical structured product will have two underlying investment components:

  • a note - (a type of debt security). This component is used to provide capital protection. It may pay interest at a specified rate and interval, and may repay some or all of your original money at maturity; and
  • a derivative - (a financial instrument linked to the value of something else, such as a stock market index or the price of another asset, such as oil or gold). This component is used to provide the potential growth element that you could get at maturity. Investors are usually offered only a share of any increase in the level of the index or asset price which occurs during the term of the investment.

What about structured deposits?

Some structured products are deposits rather than investments. Structured deposits (often marketed as "equity linked deposit accounts") can only be offered by banks which are able to accept deposits. Your money is treated as if it is in a restricted-access bank account but, unlike a traditional savings account which pays a fixed rate of interest, the interest you receive will depend on the performance of a stock market index or asset.

Key risks and product features

You could lose some or all of the money you put into these products, so make sure you understand the risks before investing.

The following list is not exhaustive and not all risks or features are applicable to each type of product.

  • Credit risk - a product may be designed and marketed by a "plan manager", but the returns and guarantees are generally provided by a third party. If that third party goes bankrupt, you could lose some or all of your money, even if a product is called "protected" or "guaranteed".
  • Market or investment risk - if the return of your original money depends on the performance of a stock market index or asset, then if the level of that index or asset falls during the term of the investment you may lose some or all of your original money. If this happens, you could lose your original money very quickly.
  • Liquidity risk - the benefits offered (such as capital protection) are usually only available if the product is held for the full term. It may be difficult or expensive to access your money before the end of the investment term.
  • No dividend income - even if a product is linked to the performance of a stock market index, you will not receive any dividend income from the companies which make up that index.
  • Capped returns - many products restrict or cap the level of the return you can receive, so if an index or asset price rises above the level of that cap, you do not receive additional returns.
  • Averaging - the return offered by some products can depend on several measurements of index levels or asset prices during the life of the investment. While this can protect you from short-term falls in an index level or asset value, it may also prevent full exposure to any gains.
  • Limited participation - many products only offer a proportion (for example 50%) of any gains made by the index or asset to which they are linked.
  • Inflation - even where a product is marketed as "100% capital protected", the real value of the capital can suffer significant erosion by inflation over the term of the investment.
  • Tax - the tax treatment of structured products depends on their legal structure and on any tax wrapper in which the product is held.

Some "capital protected" products may not be covered by the Maltese Depositor Compensation Scheme if the bank holding your deposit goes bankrupt. Your bank should disclose this information to you at the time you are offered this product.  Check the documentation which is given to you for reference to the Depositor Compensation Scheme and whether the product and the bank are covered by such scheme.

Structured products are often complicated. You should seek professional advice if you are in any doubt about the potential risks and returns involved.

Frequently Asked Questions

This section gives you easy access to commonly-asked questions about investments aspects.

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Nominee Services

Question: What does the term ‘nominee’ mean?

Certain investment firms are authorised to hold your money and investment on your behalf in their own name – that is providing ‘nominee services’. An individual would not usually require to have his monies and investments held in the name of the investment firm. You may however find it convenient to have your investments held in this way. After you determine whether you need the services of an investment firm providing ‘nominee services’, make sure that the benefits and pitfalls of having your investments held by the firm in its own name are explained clearly at the outset.

Ask how your investments could be affected, if at all, if the firm ceases to trade.

Question: I noticed that my entity charges me a “custody fee”. Why is this? What does “custody” mean?

What we have discussed so far applies to both local and foreign investments acquired through a local investment firm offering nominee services.

When you acquire foreign investments, your investment entity would usually have a nominee account with a foreign entity which registers such investments in the name of the local financial entity. The foreign entity would not normally know who the beneficial owners of the investments are (i.e. the local entity would not provide details of the names of who owns the investments – although it could be asked to do so by the foreign entity).

However, there is still an important aspect which you need to keep in mind. Although physically, investments are no longer available in paper format (the printed certificates referred to above), there would still be the need to keep a proper and up-to-date register of all holdings. When it comes to foreign investments, this register is usually maintained by a “custodian”, typically a division of a major global bank. Obviously, the investments held in custody by one of these banks are segregated from those which it owns. The “Custody Fee” is the fee which is payable to such bank for keeping a proper register of the foreign investment.

Normally, and depending on the type of investment, custody banks operate in reputable jurisdictions that give top protection to clients’ holdings. If you are unsure about the level of protection in other jurisdictions, ask your financial entity for more information.

Question: Why have nominee accounts become so popular?

While the certificated form was the traditional way of holding investments, pooled nominee accounts are now by far the most common. Nominee accounts allow investors to own investments (such as shares, bonds, or funds) without becoming involved in any of the associated administration or paperwork. The benefit to customers is that the process to trade (buy and sell) investments is faster, simpler and most often cheaper.

Nevertheless, the fact that the investments are recorded in the name of the financial entity means you will have to get its authorisation to trade your securities. In other words, you cannot sell an investment which you purchased from entity A through entity B without having obtained authorisation from entity A. Most of the times, if you are unhappy with the services received from a particular entity and wish to transfer out of its nominee account to another firm, without selling your existing investments, you will usually be charged for this.

Question: How do nominee accounts work in practice?

When you accept to use nominee services offered by your investment firm, your investments would be legally owned by your financial entity.

While the entity would become the legal owner of the investments, you would still remain the beneficial owner, meaning that you have rights over them. Your entity will keep records of which client is the beneficial owner of all the investments held under nominee.

When you receive the contract note, which is a document issued by your investment firm indicating the price at which the investment has been purchased and any charges incurred, you are most likely to notice – along with your name and address – a reference such as “[name of the financial entity] nominee Account (or a/c)”. That means that your holdings are held under nominee. Nevertheless, the investment firm cannot trade the investments without your prior written consent (or as agreed in the terms and conditions by yourself and the entity).

Let’s assume that this is the first time that you will be buying an investment through an investment firm which offers nominee services..

Before buying or selling an investment, the entity would normally require your confirmation in writing. This can be done by e-mail (if an e-mail indemnity is in force) or through other means acceptable by the financial entity.

When you pay for the transaction, the investment firm will deposit the amount in a Clients’ Account. This is a bank account which the firm uses to channel all funds relating to investments belonging to investors. It is normally a pooled account – that is, all investors’ monies would be placed in such an account. However, the investment firm will also have an investment account in your name and at least once yearly, the firm is obliged to give you a breakdown of any incoming or outgoing funds specifically related to your transactions as the beneficial owner of the investments.

Any income from investments will be sent to the investment firm, which will then be distributed to the beneficial owners by cheque, credited to an account or reinvested, depending on the beneficial owner’s instructions.

Nominee accounts are designed to facilitate trading of investments as entities can conduct transactions electronically. This means that investments held in nominee accounts can be processed much more efficiently.

Many Investment firms now provide their clients with an online trading system which gives the beneficial owner the opportunity to trade outside the opening hours of their entity in the comfort of their own home.

Question: How do I know if a financial entity offers nominee services or not?

You may ask the financial entity for such information directly.

If you want to verify such information, you should check the investment service licence of the entity and check whether under services the Nominee Service is listed on its licence.

Question: How safe are Nominee accounts?

Many investors don’t understand exactly know how their investments are held and what the risks to their account are if the worst happens. Unless you have been informed otherwise, your account is almost certainly a pooled nominee one. This means that the legal owner of the shares is your entity and your investments are aggregated with those of other investors dealing with the entity.

Put like that, it may sound quite alarming but you should not worry too much because there are legal systems in place to safeguard your holdings and money.

The MFSA’s Conduct of Business rules clearly stipulate that your investments should be held separate from those of your investment firm. Nominee accounts are “ring-fenced” (that is, they are held separately) from the entity’s business accounts – so you should not worry that your investments are being combined with those belonging to the entity.

The separation between clients’ investments (and monies) and the entity’s investments (and monies) is crucial to how this arrangement operates. This is however not the only requirement, the rules also require the entity to keep proper records of each customer’s investments such that they are easily identifiable from the investments of other clients, also held under nominee.

Furthermore, the law stipulates that in the case of liquidation of a financial entity (the process which ensues after a company is declared insolvent), the creditors of that entity shall be unable to claim or demand any right of action on or against the investments held under the control of such entity for and on behalf of and in the interest of any of its customers. In the event of any such insolvency or bankruptcy, the entity shall – on request of the customer or the Authority – immediately transfer the control, possession and title to all assets held by or in the name of an investor to another entity or to such other person as may be instructed by the customer or the Authority.


Licensing Type

The Investment Services Act provides that Investment Firms can choose from a wide variety of different activities to offer clients. In this respect, not every Investment Firm is authorised to offer the same licensable activities. An Investment Firm can be authorised based on the type of services offered to the potential clients.

Hereunder, please find an explanation of the different activities an investment firm can apply for, and what each activity provides.

1. Reception and transmission of orders in relation to one or more financial instruments.

The reception from a person, the end client, to buy, sell or subscribe for instruments and the subsequent transmission of that order to a third party for execution. In this respect, the Investment firm would not be the entity executing the trade.

2. Execution of orders on behalf of clients.

Acting to conclude agreements to buy or sell one or more instruments on behalf of clients and includes the conclusion of agreements to sell instruments issued by an investment services licence holder or a credit institution at the moment of their issuance. The trade is executed by the Investment firm.

3. Dealing on own account.

The Investment firm would be trading against its own proprietary capital, resulting in conclusion of transactions in one or more instruments. The Investment firm is therefore required to properly monitor its open positions, in order to ensure that the capital can cover such exposures.

4. Management of Investments / Portfolio management.

The Investment firm will manage assets belonging to another person, based on criteria that are suitable to the end client. The investment firm will have discretion to invest in one or more instruments on behalf of the client.

If those assets consist of or include one or more instruments or the arrangements for their management are such that the person managing or agreeing to manage those assets has a discretion to invest any of those assets in one or more instruments.

5. Investment advice.

The investment firm would be giving, offering, or agreeing to give, to persons in their capacity as investors or potential investors or as agent for an investor or potential investor, a personal recommendation in respect of one or more transactions relating to one or more instruments, based on the underlying type of client.

6. Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis.

The underwriting or placing of instruments would mean that the Investment firm assumes the risk of bringing a new securities issue to the market by buying the issue from the issuer, thereby guaranteeing the sale of a certain number of shares to investors.

7. Placing of financial instruments without a firm commitment basis.

The marketing of newly-issued securities or of securities which are already in issue but not listed, to specified persons and which does not involve an offer to the public or to existing holders of the issuer’s securities’ - without assuming the risk of guaranteeing the sale of a certain number of shares by buying the relative securities from the issuer.

8. Trustee, Custodian or Nominee Services

The investment firm is authorised to act as trustee, custodian or nominee holder of an instrument as part of providing the services 1 to 5 as highlighted above. Additional information on nominee services is provided in an ad-hoc section further down this webpage.


Once an Investment Firms has been licensed by the MFSA, for the safeguard of its clients, there are different prudential requirements which, according to the size, complexity and range of services offered, the Firm will have to satisfy. According to such requirements, deriving from the EU Investment Firms Regulation (EU 2019/2033) and EU Investment Firms Directive (EU 2019/2034), an Investment Firm is classified under one of the following four Classes:

  • Class 1
  • Class 1 minus
  • Class 2
  • Class 3
The Role of the MFSA

Question: Is the MFSA authorised to provide investment services?

No. The MFSA is prohibited from providing investment services to the public. The role of the MFSA is to license, regulate and supervise those entities providing investment services in or from Malta. That is why the MFSA is defined as the single regulator for financial services in Malta. The MFSA is therefore not in a position to provide you with any advice on investments.

Question: How do I make sure that the firm is authorised by the MFSA and is reliable?

All entities authorised by MFSA undergo a rigorous and lengthy process before they are authorised to service your investment requirements. The MFSA must be satisfied that these firms are professional, knowledgeable and trained. Moreover, the MFSA goes into great lengths to ensure that such firms are of the highest integrity.

One can visit the MFSA website to check whether such entity is licensed or not and if licensed what activities it is licensed to carry out. In the licence there is indicated what services an entity is licensed to provide and in relation to which financial instruments it is authorised to provide the mentioned services.

Moreover, a firm is required to state that it is regulated by MFSA to conduct investment services on its letterheads, business cards, stationery and adverts.

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