Understanding Trading Risks

Advice for the Customer regarding Investment Instrument Trading Risks

1. Generally about risks
2. Trading with the use of credit or loan (further also “margin transactions”)
3. Day trading
4. Structured investment instruments (derivatives)
5. Specific aspects and risk of trading securities abroad

1. Generally about risks

• Investment instruments and/or services regarding which an order may be placed with the Broker may not be suitable for each investor; unless you have been instructed about the details of the trading principles, you should not make use of the Broker’s services.
• The anticipated or potential yields are not guaranteed. Previous yields are not a guarantee of future yields. The investment is associated with a risk of value fluctuation and the return of the money you have invested is not guaranteed.
• In each form of investment, the earning potential is closely associated with risks. The higher is the earning potential, the higher is the potential risk. The risk of loss associated with short-term securities trading is high (e.g. speculative margin transactions in SPAD, margin transactions in the USA, knock-out certificates, warranties).
• The investment instruments denominated in foreign currency are also subject to fluctuations based on changing foreign-exchange rates which may have both positive and negative influence on the rates, prices, increase in value or yields arising in other currencies, or on changes in other parameters.
• Investment instruments include the issuer’s credit risk. This means the risk that the issuer will enter into bankruptcy, owing to which the issued investment instruments will significant decrease in value or become entirely valueless. In this case, the investor must be ready to accept the fact that the entire invested capital may be lost. Other negative aspects affecting the value of investment instruments include the issuer’s reduced rating.
• The availability or marketability of investment instruments may differ and for this reason, it may be complicated to buy or sell a certain investment instrument (liquidity risks).
• Investments into investment instruments are generally associated with certain risks arising particularly from the nature of the specific investment instrument and from the legal regulations and rules of the relevant financial markets or countries (legal risks).
• If a Customer decides to seek Broker’s advice, the Customer thus acts exclusively on the basis of its own decision, expressly declaring to be aware of the fact that the Broker’s advice may prove to be inaccurate in the future, that the investments based on such advice may result in a loss and that the Broker may withdraw or change its advice at any time depending on further development, event to an opposite. The Broker provides the Customer with mere advice, it is always up to the Customer to make investment decisions and bear full responsibility for them.
• The investment result is negatively affected by the transaction fees. Broker's fees are charged even if the transaction concerned results in a loss. The so-called spread, i.e. the difference in the bid and ask market prices is an important factor negatively affecting the result of trading. This difference reduces the investor's profit and increases potential loss.
• The Customer bears full responsibility for due taxation. It is necessary to consider the impact of the investments with respect to the Customer’s tax situation, in cooperation with a tax advisor.
• If you enable the use of investment instruments for transactions on the account of another person, the investment instruments will be excluded from the Customer property regime; however, you will obtain security for the provision of the investment instrument loan in the form of cash that becomes the Customer property. If you enable the provision of a loan for transactions on the account of another person, the financial resources will be excluded from the Customer property regime; however, you will obtain security for the provision of the loan in the form of investment instruments that become the Customer property.
• The use of a loan for the purposes of securities trading always means an increased risk. Interest charges for a loan reduce the overall profit and the use of a loan multiplies the rate on return which may result in the loss of all the invested financial resources in the event of a decrease in the value of the security value.
• For the financing of risk investments, you should not use resources essential for the satisfaction of your basic living needs.

Possibility of risk limitation:

• Diversify your investments. By investing in various investment instruments or various sectors, it is possible to reduce the overall investment risk. On the other hand, diversification requires a sufficient volume of financial resources.
• Keep regular track (possibly on a daily basis) of the situation and value of your investments – this is the only way to avoid unpleasant surprises and be able to respond in a timely manner.
• Always make sure that the investment instrument market to which you aim your investment is sufficiently liquid.
• Use limit instructions so that your instructions are not executed under disadvantageous rates.

2. Trading with the use of credit or loan (further also “margin transactions”)

• Before you decide to make use of a credit or loan for investment instrument trading (i.e. margin transactions), you should consider whether you are financially strong above to be able to deal with negative developments on the capital markets and to repay the interest on the credit or the money lent. Even though the u se of a credit for purchasing investment instruments may increase your yield, this also represents higher risk of loss to which we would like to expressly draw your attention:
• The interest which you pay for the money lent may be higher than your profit from the trading.
• The amount of your credit may increase thanks to the interests which will mean a loss for you if the market value of your investment instruments decreases or stagnates.

For this reason, please pay particular attention to whether the value of your investment instruments is always sufficiently higher than the overall value of your credit.

• The risk of loss is higher in margin transactions, owing to the leverage effect, i.e. under the negative development of the rate of your position and inability to increase the margin to the required value (or under time pressure), you may lose all your invested resources during a very short period of time. The higher is the financial lever, the higher risk there is for your position.
• After the opening of a margin transaction (position), it is necessary to you or your agent remain permanently accessible via phone. If your broker is unable to reach you with respect to arranging for the financing of a margin transaction (or repo-transaction), your margin position may be closed even without your instructions, in accordance with the Brokers General Business Conditions. Any financial resources left will be transferred to your financial account kept with the Broker, after the deduction of expenses. Any damage incurred in this respect will be claimed.
• Should the rate of the securities drop below the critical limit within the margin, the broker is authorized to close such a position in the situation concerned (so-called margin close). Because time pressure may play an important rule in these situations, such forced margin close of a position may result in an additional financial liability for your; you hereby acknowledge and confirm by signing this questionnaire that the amount of such liability is unlimited (debit on your financial account and the expenses associated with such a debit).
• The broker is not obliged to have regard for the margin increase, the relevant amount registered on your account kept with the Broker shall be decisive.

REPO transactions in the SPAD system – instructions for the Customer regarding the extent of his/her liability in the event of a third parties’ failure:

• Position closing: Should the bank fail to transfer the Customer’s money to the account of the Broker’s creditor so that it is credited to the creditor’s account as of the maturity date, the Broker shall be entitled to claim the Customer’s payment of a penalty at an amount stipulated in the General Business Conditions, based on the default in payment.
• REPO opening: Should the creditor fail to transfer the money to the Customer’s account in a timely manner, the Customer's financial account may post a debit balance and the Customer shall be obliged to pay a penalty from the value of such a debit balance. If this situation continues for longer than three business days, the Broker shall be entitled to sell all Customer’s securities kept at the portfolio account or any part hereof in order to settle the debt.
• REPO closing: Should the creditor fail to transfer all securities to the Customer in a timely manner, the Broker shall be authorized to purchase the securities concerned on the Customer’s account, resulting in a duty to pay a penalty. In addition, the Customer's financial account may post a debit balance and the Customer shall be subsequently obliged to pay a penalty from the value of such a debit balance.

Possibility of risk limitation:

• Do not borrow money at the upper level of the credit limit.
• Provide stop-loss instructions determining the so-called stop price at which the Broker will close the position to avoid any further increase of the loss.
• If the credit security decreases, you will obtain a so-called margin call from the Broker and will be obliged to add further resources or investment instruments to your account during the shortest possible time period. For this purposes, you should opt for the following strategies, for instance:
• To have quick access to cash which you are able to transfer to your financial account during a very short period of time (cash deposit to your customer account or express bank transfer).
• To have quick access to investment instruments so that you can transfer them to your portfolio security account during a short period of time.
• To have a list of investment instruments that you are ready to sell.
• Quick response. It is necessary to respond quickly to a margin call. If you do not respond or fail to respond quickly, your margin transactions may be forced to close.
• To be available on the phone at all times, or appoint an agent for communication and negotiations with the Broker.

3. Day trading

Day-trading means orders for purchasing and selling the same securities during a single day.

• Day-trading is not suitable for persons with limited resources and small toleration to risk. Day-trading may lead to extensive and irreversible loss. Day-trading is highly demanding in terms of the securities market knowledge, and the knowledge of trading techniques and strategies. If you want to reach profit via day-trading, you will have to compete with professionals, brokers of licensed security traders.
• At some situations, it may appear difficult or impossible to close position in due time for a reasonable price. This may be the case in the event of sudden market downfalls, interrupted trading or unexpected occurrences. In addition to market risks, your are exposed to the risk of the trading system failures.
• Day-trading also means a high number of transactions and the transaction expenses associated with this, which may significantly reduce your yields. Day-trading for a margin or with the use of short-sell may lead to loss (other financial liabilities), exceeding your original investment. You hereby acknowledge and confirm by signing this questionnaire that the amount of additional financial obligations is not limited .

Possibility of risk limitation:

• Provide stop-loss instructions determining the so-called stop price at which the Broker will close the position to avoid further increase of the loss.

4. Structured investment instruments (derivatives)

Discount certificates
These are investment instruments with value depending on the value of the underlying assets or share index. These are investment instruments (certificates) for which the issuer will provide the investor with a discount; however, the investor's profit is limited to a predefined maximum value (cap).

Knock-out certificates
These are high-risk investment instruments with value depending on the value of the underlying assets or share index. The risk associated with the purchasing of a knock-out certificate depends on the size of the financial lever. These products are equipped with the so-called knock-out limit preventing from the duty of investor’s additional financial coverage. If the rate of the underlying asset (e.g. share index) reaches or exceeds the knock-out level at any time during the validity of the knock-out certificate, the knock-out certificate will be automatically closed by the issuer and settled. It is very likely that all invested financial resources can be lost, even during a very short time period in the event of higher financial levers. However, knock-out certificates offer high profit potential.
Risk associated with investments into knock-out certificates

• Small quantities can be issued in the event of knock-out certificates, which is associated with a higher liquidity risk. This may lead to significant fluctuations of rates with respect to individual knock-out certificates, particularly near the knock-out limit.
• The risk of investments into knock-out certificates is in the adverse development of the underlying asset. Reaching the knock-out level even with a short-term rate fluctuation at a growing trend will lead to a total loss of the invested capital.
• The knock-out certificate rate is affected by a number of factors, particularly the value of the underlying asset and the size of the financial lever (external financing). This means that even without any changes to the underlying asset the knock-out certificate rate may go down.
• The knock-out certificate rate always responds to changes in the underlying asset rate. The higher the financial lever in the knock-out certificate, the higher risk is associated with the investment. The financial lever enables higher profit on one hand while bearing higher risk of loss on the other hand. The financial lever may be effective in two directions.
• The spread between the offer and demand on the market is usually determined by the issuer who is in most cases the only market maker. This is also closely associated with the fact that in some cases there is not a direct proportion relationship (linear) between the price for the knock-out certificate (warrant) and the value of the underlying asset. In some sorts of knock-out certificates (as well as other sorts of certificates), the purchase price may be lower than the current value of the underlying asset. This is often the case with for instance exotic certificates, i.e. the expenses on their holding or purchase and sale are significantly higher (as compared to, for instance, plain-vanilla certificates).
• If the structure of knock-out certificates (as well as other sorts of certificates) is complicated, it is necessary to draw the attention to the possibly lower price transparency (correct quotation), particularly as regards indices constructed by the issuer, thematic certificates issued for a certain basket of investment instruments (e.g. technological shares), or in cases when the issuer is able to modify some titles in the index. The issuer may use this situation as a market maker to increase the profit margins.

Possibility of risk limitation:

• Provide stop-loss instructions determining the so-called stop price at which the Broker will close the position to avoid further increase of the loss.

Warranties
These are high-risk investment instruments, securitised options, the value of which depends on the value and volatility of the underlying asset (e.g. share index), maturity, realization price and the financial lever. Warranties are securities, with which the owner obtains a right to buy  (call warrant) or sell (put warrant) a certain underlying asset (e.g. shares) as of a prearranged date, for a previously stipulated price. The owner of a call warrant has obtained a right to purchase an underlying asset for a fixed price. The investment will bear profit if the market price of the underlying asset is higher than the warrant’s realization price, after the deduction of the warrant purchase price. The risk associated with the buying of the warrant depends particularly on the size of the financial lever and the expiration period. It is very likely that all invested financial resources can be lost, even during a very short time period in the event of higher financial levers. However, warranties offer high profit potential.
Risk associated with investments into warranties

• The entire invested capital may get lost.
• Small quantities are usually issued in the event of warranties, which is associated with a higher liquidity risk. This may lead to significant fluctuations of rates with respect to individual warranties.
• As regards investments into warranties, the yield upon the investment cannot be determined previously.
• The risk of investments into warranties is in the adverse development of the underlying asset. Under some circumstances, this development may lead to a total loss of the invested capital.
• The warranty rate is affected by a wide range of factors, e.g. the maturity period or volatility of the underlying asset. This means that even without any changes to the underlying asset the warranty rate may go down. Based on the limited validity period, the time value of warranties changes on a daily basis. The closer is the warranty’s expiration date, the more intensively its time value decreases, until it reaches zero. The high time value may also case the rate risk to increase. For the reasons above, investments into warranties with high time value and close to their expiration date is very risky. We strictly discourage you from purchasing warranties just before the maturity period. Warranties with a negative time value do not provide any guarantee that the time value will turn to positive. It is therefore impossible to expect easy profit without risk.
• Purchasing warranties with high volatility means an expensive investment and is therefore very speculative, just like purchasing warranties with a great lever.
• The warranty rate fundamentally responds to the changing rate of the underlying asset; however, not at a linear manner. The lever effect in warranties may mean higher profit on one hand while bearing higher risk of loss on the other hand. As regards warranties, the financial lever is effective in two directions. The higher the financial lever in the warranty, the higher risk is associated with the investment. The very high lever effect applies particularly to warranties with a very short maturity period remaining. The inner lever may change during the course of position holding.
• The only chance to obtain profit from warranty investments is in the increasing rate of the warranty. Warranty issuers pay neither no dividends nor interests, i.e. rate losses cannot be compensated by additional yields.
• Keep a constant track of the position of your warranties, so that you are able to respond quickly if the market is extremely volatile to avoid (total) loss.
• The warranty you purchase will loss its entire value – resulting in a total loss for you – provided that:
• you waive the right of application during the course of realization,
• you miss the deadline for the application of your rights,
• by the expiration date the warranty has a zero intrinsic value, i.e. is “out of money”.

In these cases you will lose your invested capital (warranty purchase price) and all the related transaction fees.

Possibility of risk limitation:

• Provide stop-loss instructions determining the so-called stop price at which the Broker will close the position to avoid further increase of the loss.
• Keep yourself informed about whether your warranty may be realized on an on-going basis (American options) or only by the maturity date (European options).
• Keep yourself informed about how many warranties are required to maintain the value of the underlying asset.
• Make sure that the underlying asset is supplied upon the realization or whether financial settlement is opted for.
• Always keep track of the maturity date because your broker will not realize your warranty without an official order. It is also necessary to reflect all side fees (purchase/sale fees) in connection with warranty purchase or sale. In extreme cases, the extra fees may exceed the price for your warranty. Even if you apply your warranty, the extra fees must be paid. This is the only way to be able to calculate what the change must be in the value of the underlying asset or warranty, to ensure that the warranty provides profit. This means that the higher the extra charges, the later you will obtain profit. If the rate does not develop in the expected direction, the extra fees will increase your loss.

5. Specific aspects and risk of trading securities abroad

The legal relationship between the Customer and the Broker is governed by the laws of the Czech Republic. The relationship between the Broker and Penson Financial Services is governed by the laws of USA, and the relationship between E*Trade Germany AG and Commerzbank AG is governed by the laws of Germany. The legal regime of the Customer’s assets kept outside the country is governed by the valid laws of USA and Germany.

• The Customer has been made familiar with the fact that the registration of investment instruments, unless these are registered directly at the Customer’s name, is effected on the Broker’s cumulative account in the USA, kept with Penson Financial Services and in Germany, kept with E*Trade Germany AG and Commerzbank AG. The collective account means a customer account kept at the Broker’s name, at which the property of more customers is kept at a time. Collective accounts are used in order to save on the expenses on one hand and to avoid complications associated with the establishment of individual accounts. The Broker subsequently maintains an internal registration pursuant to which it is possible to reliably identify the immediate position of each customer.
• If the Broker is informed about any existent offers for takeover or other offers or capital reorganization by Penson Financial services, E*Trade Germany AG or Commerzbank AG, such information will be passed to the customers concerned.
• The Broker will enable customer to apply their pre-emption right and the right to subscribe shares in its name to the customer’s account, based on the settlement of the expenses demonstrably incurred in connection with the execution of such a right.
• The rights arising from securities abroad will be credited to the Customer’s account after the deduction of demonstrable expenses.
• In the event of a collective account, it may be difficult to clearly identify the requirements of individual customers by means of the electronic registration.
• In the event of a deficit that cannot be settled and the Broker’s inability to compensate for the incurred damage, the situation may lead to the Broker’s bankruptcy with all negative consequences.

The Customer agrees that its resources are kept on a collection account.