Complex investments
All financial and investment products take some time and effort to understand, especially if you're considering them for the first time.
But some investment products are complex even if you're quite familiar with financial matters. These products may involve complex financial risks, complex ownership arrangements or complex rights and obligations. Unless you really understand what's involved, you may be better off avoiding them.
Should you choose any of these products? Use our checklist to see if you understand the product, its risks and whether it could suit your needs.
How do these products work?
If you've been puzzled by what these products are, here's a starting point for finding out more. Mind you, individual products may have different features that will make an important difference to the risks and possible rewards.
Some products can be traded fairly readily, for example through the Australian Securities Exchange (ASX). That means you can sell your investment if you need to. With other products you may have to:
- wait until they mature, or
- sell them back only to the issuing company for a fee or by paying a penalty.
For your own safety, make certain you read the product disclosure statement or offer document and get independent advice from a licensed financial adviser before you invest.
Contracts for difference
Also known as CFDs or 'spread-betting'.
Essentially, under a CFD you are borrowing money to bet on the short-term movement of share prices. If you're right you make money, if you're wrong you lose.
CFDs are generally highly geared products. This means your stake will generally only be a fraction of the market value of the shares you're contracting for. For example, you may be permitted to borrow up to 95% of the value of your contract. In that case, just 0.5% or 1% change in the price can turn into a 10% or 20% loss. In today's markets, daily price changes like this happen quite frequently.
You're effectively gambling a much larger amount of money than if you went to the casino or racetrack.
You therefore face potentially unlimited losses. The contract is legally binding agreement, no matter what the market value of the asset is.
If the market turns against you, so that you're losing money, the product issuer:
- will require you to pay in extra money or
- may close out your contract, for whatever it's worth at the time, to recover some money. If there's not enough money, you will still be legally bound to make up the difference.
Thinking about investing in CFDs?
Read our complex investment products checklist first.
Read more about contracts for difference
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Collateralised debt obligations
Also known as CDOs.
A collateralised debt obligation is a security based on a variety of debts, such as mortgages or bonds, that can range in quality from secure to highly risky.
You effectively buy the right to receive interest payments from a pre-mixed cocktail of mortgages or bonds. The riskier bonds may allow for higher returns, but they introduce a higher risk of losing earnings or capital.
Each CDO is different. The financial arithmetic and legal structures can be formidable and the offer documents can make challenging reading.
Thinking about investing in CDOs?
Read our complex investment products checklist first.
Capital guaranteed or protected investments
Capital guaranteed or protected products offer a market-linked investment return, with a promise that you should at least get the dollar value of your initial investment back if investment markets turn sour.
For example, a capital protected investment linked to Australian shares may pay investors a return equal to 80% of the cumulative growth in the S&P/ASX 200 share index over 5 years, with a guarantee that if the index makes a cumulative loss over this time, you will still get the original amount you invested back at the end of the 5 years.
No investment is 100% secure. In certain extreme circumstances—for example, if the company providing the guarantee or protection goes belly-up—you can still lose your money with these investments.
Even if you are confident in the security of the guarantee or protection, you need to weigh up the cost with the benefits they can provide. It's also important to remember that inflation can eat into your capital even if falling investment markets don’t.
Investments with capital guarantees or protection, simple as they might sound, are actually more complex than regular investments.
Before you invest, make sure you do your homework See fact sheet Get the facts: Capital guaranteed or protected investments 
Futures
Futures are legally binding contracts to buy or sell a particular asset (or cash equivalent) on a specified future date. For example, a company may use a futures contract to lock in the price of a foreign currency it needs to buy at some future date. Futures are also widely used for speculative trading.
Both the buyer and the seller of a futures contract face potentially unlimited losses. The futures contract is a legally binding agreement to buy or sell the underlying asset at the agreed price on the specified future date, no matter what the market value of the asset is when the contract matures. Futures contracts may be bought and sold on the Australian Securities Exchange (ASX).
Thinking about investing in futures?
Read our complex investment products checklist first.
Hedge funds
Also known as absolute return funds.
Hedge funds aim to make money for investors in both rising and falling markets by relying heavily on the skill of the investment managers to buy and sell the right investments at the right time. Hedge funds may invest in all sorts of securities and non mainstream asset classes, may use a wider variety of complex investment techniques than traditional funds and may borrow money to pay for the fund's investments.
The skill of the investment managers and the reliability of their systems for managing risk can be critical.
The fees charged by hedge funds may be higher than more conventional managed investments, as a performance fee is normally charged in addition to the management fee, so you need to consider if you'll be adequately compensated through extra returns.
Each hedge fund is different, so read the product disclosure statement to make sure you understand the investments and strategies the investment manager will be using. Hedge funds offered to the public must be registered, and the operators must hold an Australian financial services licence.
Thinking about investing in hedge funds?
Read our complex investment products checklist first.
Options
An option is a contract between two parties giving the buyer the right, but not the obligation, either to buy or to sell an asset, for example a parcel of shares, at a set price, on or before a specified future date.
The seller of an option keeps the money paid for the option whether or not the buyer exercises their rights. If you buy an option but don't exercise it by the due date, it expires and becomes worthless.
You can also buy or sell options at any time, for example on the Australian Securities Exchange (ASX). The market price of an option will reflect the current value of the asset and also the time that's still left before the option expires. If the value of the asset covered by the option remains unchanged, the value of the option falls as the settlement date approaches.
Thinking about investing in options?
Read our complex investment products checklist first.
Stapled securities
Stapled securities are created when two or more securities are contractually bound together so that they cannot be bought or sold separately. Many different types of securities can be stapled together. For example, a property trust may have its units stapled to the shares of the company that manages the trust's properties.
Trusts and companies may use stapling to reduce their corporate tax or legal burdens. However, it can make your personal affairs a little more convoluted than if you held just a share in a company, or a unit in a trust.
Sometimes stapling may change the security you have. For example you may move further away from being a creditor of the company and closer towards being a shareholder. (Shareholders generally get paid last, if at all, when a company is wound up.)
Thinking about investing in stapled securities?
Read our complex investment products checklist first.
Warrants
A warrant is a financial product issued by a bank or other financial institution, which is traded on the Australian Securities Exchange. It gives you the right to buy shares (or currency, an index or a commodity) at a set price within a specified time.
Some warrants may be designed to help you buy an investment over a period of time, such as instalment warrants. These are similar to the investment receipts for the purchase of Telstra shares issued by the government.
You may purchase instalment warrants for long term investment purposes from major financial institutions or investment banks, that typically give you a longer time to pay and may be less frequently traded on the market.
Some warrants are designed for trading purposes, with shorter times to pay, and are traded frequently. These warrants often involve more risk.
Thinking about investing in warrants?
Read our complex investment products checklist first.
FIDO Website: Printed 07/31/2010
