Why Investors Must Care About Risk Warnings

Risk is very important to the investment process, nonetheless, remains a concept that is not particularly well understood by many investors. Still, risk warnings – those vaguely worded, fine print disclaimers are extremely important for both buyers and sellers.

Fortunately or unfortunately there are many types of risk warnings and they often remain unread or are not sufficiently explicit. Many investors do not take into account all risk factors. It is not hard to understand them. A person needs a substantial level of experience and sophistication to know what they really mean or a financial advisor needs to take the time to explain it to the investor carefully. Yet, in many cases, these conditions do not prevail.

In certain cases, sellers obviously prefer to keep people in the dark in order to make a sale. Let’s have a look at the nature of risk warnings to learn more about the situation.

Many inexperienced investors probably want to ask one question: where do these warnings appear and Why? To cut a long story short, mainly for legal reasons. Investment firms, as well as financial institutions, generally publish some kind of warning in their brochures and on internet sites. The goal is not only to explain to the investor the nature of the risks involved in the particular kind of investment being offered but also to ensure that there can be no lawsuits if something goes wrong. Interestingly, the warnings are either in a separate internet link or printed on additional pages. Moreover, the length tends to vary from one sentence to several pages.

Investors and examples of written warnings

Now, we can deconstruct written examples. Investors should pay attention to even minor details. We will see what the companies say and just how useful it is.

First example. This example is quite interesting and vague at the same time. It is quite hard even for experienced investors to understand all details, so there is no need for additional problems. Let’s get back to the first example: an investor may get back less than the amount invested. Moreover, “Information on past performance, where given, is not necessarily a guide to future performance”.  Such warnings are very common, regrettably.

The main issue with such warnings is that there is no quantification and the warning does not really hit home. For example, can you lose 5% or 25%? There is a huge difference between the two. Furthermore, it is unlikely that this warning alone will ensure that the unwary investor knows what could potentially happen to their money.

For inexperienced investors, it will be quite difficult to understand this example. “The investments, as well as services offered by us, may not be appropriate for everyone”. Moreover, the company warns that “if you have any doubts regarding the merits of an investment, you should seek advice from an independent financial advisor. Without a doubt, the above-mentioned example warns people to be careful, but how many investors really understand what is meant by “appropriate”. Moreover, if the investor trusts the seller, they will think that they are being careful.

Let’s have a look at a great example. This example clearly states what people musk know about risk factors. “You should not buy a warrant unless you are ready to sustain a total loss of the money you invested plus any commission or other transaction charges”.

Useful tips

A warning should comply with a number of requirements, quantification is one of them. Even though this is not always possible, investors should have some idea as to the proportion of their money that they could lose.

Furthermore, warnings should be easy to follow. That means any risk warning should be easy to understand. For instance, if you do not understand what the risk warning is all about, don’t assume that the investment is right for you just because you trust the seller.

Signing is very important for both sides. So, if an investor has to sign the warning, this demonstrates its importance and provides good protection to the firm. Still, never sign anything you do not understand.

We should not forget about internet warnings. When it comes to the internet, it is all too easy to click away from a warning and carry on with the deal. In an ideal scenario, the link, as well as entry, would be very clear and an investor takes the warning seriously. Unfortunately, in the real world, nonetheless, and it is up to investors to make sure they read the disclaimer before continuing.

Last but not least, personal advice. This is the only way many people will really understand the risks of a given investment. So, if the print warning does not meet your criteria, seek personal advice. As a result, it will be easier to understand all risk factors. Moreover, the seller should make a note of how the warning was presented, if possible, get the investor to sign this too.

Conclusion

Investors should take into consideration various factors. They have the right to request verbal and/or written information. Besides, don’t stop until you are fully aware, in quantitative terms, of what you stand to gain and lose, and what other potential investments there are with different risk/reward ratios.

It is very important risk warnings must be clear and sufficient. They should not only provide legal protection but also must ensure that the message truly gets home. Advisors, as well as firms, should only sell products with a warning that conveys the real level of risk clearly. Quite often, many investors simply disregard risk factors. However, as an investor, it is crucial to know how much money you could lose and what circumstances could cause this to occur. There is no need to make hasty decisions if you are uncomfortable with the risks. There are plenty of less stressful alternatives.