Investing in equities entails risks that you know and should be aware of. It is not a traditional investment, but a speculative investment with significant risks, up to the risk of total loss. Please read the following risk notices carefully and do not just skim over them.

1. What are stocks?

Shares are equity securities. They embody the participation in the assets of the corporation and, insofar as the voting rights are not excluded, also convey voting rights which include the right to participate in the shareholders’ meeting. A return is made if a dividend (profit sharing) is paid out and / or at the time of sale, a sales price in excess of the purchase price is achieved (price increase). No guarantee can be given for the return on investment in equities. An investment in shares is a risk investment.

2. Rights from shares

The rights and obligations of the shareholders are subject to the law to which the corporation is subject. They are determined by the laws of the country of incorporation or domicile and by the articles of association and any rules of procedure of the company. These laws may vary, so that the rights and duties of a shareholder in a German stock corporation may differ materially from those of a stockholder in a US corporation. Certain rights, such as subscription rights or voting rights, may also be excluded.

The most important rights are:

  • Right to any dividends in the case of profit distributions,
  • Right to purchase new shares in the case of capital increases,
  • Right to a share in the liquidation proceeds, i.e. in the distribution of the assets of the company in liquidation,
  • Right to attend the shareholders’ meeting,
  • Question and information right at a shareholders’ meeting,
  • Voting rights.

The share per share can be designed differently.

For bearer shares, the acquisition and possession of the share certificate is the proof of the stock corporation law. The share right is transferred by transfer of the deed. The right depends on the certificate.

For registered shares, the deed is issued in the name of the shareholder. Usually, the Company also maintains a shareholder register or register of shareholders in which the shareholder is registered. These shares are normally transferred by way of an assignment agreement and by a deed of the instrument.

In some cases, the transfer of shares may be subject to the approval of the Company (transfer) or otherwise limited.

In addition, the registered or bearer shares may be designed as so-called preference shares. The exact form of the preference is governed differently and depends on the legal system of the issuer. Common to all is that the preference shareholders to the “normal” shareholders a prerogative (so-called preference) is granted. This preference usually exists in a prerogative in the distribution of profits or in the distribution of liquidation proceeds in the event of insolvency. There are, depending on the legal system, but also other benefits possible. Some jurisdictions make it possible to exclude the voting right in the event of a preference, which under certain conditions can be revived.

In general, there is only one obligation of the shareholder, namely the payment of the subscription amount to the company. If the stock is fully paid, the ordinary investor shareholder has no further obligations.

3. The stock value

A distinction is made between nominal shares and no-par value shares or no-par-value shares. For nominal shares, the nominal value must not be confused with the actual value of the share. The face value is a symbolic value that can coincide at the beginning of the company and, coincidentally, later with the actual asset, price or market value of a share, but usually has nothing to do with it. For no-par value shares, this paper value is waived. The share represents in this case a fraction or a quota of the company assets.

4. Market significance

Equities will also differ according to their significance and position in the stock market.

Here are standard stocks (or “blue chips” called) to consider. These are usually the stocks of the leading and largest companies in the industry whose share price performance is often included in key stock indexes, which in turn are benchmarks for professional investors (e.g. fund managers). These papers are traded on a large scale. For them, there is almost always a liquid market where you can sell the papers. On the other hand, there are the ancillary or special stocks, which are mostly the stocks of smaller to very small companies, for which special markets were or will be created on the stock exchanges or which are not traded on a stock exchange at all.

5. Risks of the company (entrepreneurial risk), insolvency risk

The buyer of a share is the investor (investor).By acquiring the share, the investor participates in the economic development of the corporation, becoming a shareholder and thus a shareholder.

The entrepreneurial risk describes the danger that the development of the company is different than expected. An economic downfall of the Company will generally result in a severe decline in the value of the Company’s stock. In extreme cases, especially in the case of insolvency of the company, a stock investment becomes completely worthless.

In the event of liquidation of the Company or insolvency, the shareholders will be serviced by all other creditors of the Company. This may mean that the deposit can not be paid or only for a small fraction.

The risks of the company lie in the general economic development (economy) and the special situation of the enterprise, which can hold oneself better or worse than other enterprises in the market. These factors affect the value and thus the resale price of the share. This risk can be realized in case of very negative general or company-specific development up to total loss of the share value due to insolvency of the company. This risk is lower for the default values than for the minor or special values, but can not be ruled out.

6. Price change risk, risks of general conditions and market psychology

Stock prices have unpredictable fluctuations. Short-, medium- and long-term upward or downward movements alternate, without a firm connection for the duration of the individual phases to derive. The price change risk can be subdivided into the general market risk and the company-specific risk.

The general market risk of a stock is the risk of a price change attributable to the general tendency on the stock market, which is not directly related to the economic situation of the individual company. General conditions include the rate of inflation, the fixing of key interest rates and other economic factors that are positively or negatively processed by stock exchanges or any other generally accessible secondary market (resale market).

The market risk is subject to the shares of all companies. Thus, in parallel with the overall market, the share price of a company, even of standard shares, may fall on the stock market, even though the company’s economic situation has not deteriorated. For example, stock prices can fall by double-digit percentages across the board without any change in the substance or earning power of the company.

Fall in prices, even with standard stocks, from 30 to 40% within a relatively short time are quite possible. As part of the investment concept, no attempt is generally made to forecast and actively use market fluctuations. The assets are – as in the case of an investment company – regularly invested almost completely. Accordingly, the general market risk, for example in the event of stock market default, may affect the assets of the investor in full.

Company-specific risk refers to the risk of a decline in the price of a share due to factors that directly or indirectly affect the issuing company (see also above under “Business risk”). Causes of such share-specific price development may lie in the economic situation of the company, but may also result from general economic factors. A stock price only describes the daily relationship between supply and demand for this stock and does not necessarily match the business value of the stake in the company.

7. Country risk and rights of rights management, information risk

When acquiring foreign shares, the investor must be aware that he may be able to dispose of the selling price of the share in the case of a sale, possibly after a longer period of time or after a rewriting. If the investor acquires foreign shares or maintains his custody account abroad, he may be subject to capital transfer restrictions that make it impossible for him, for a shorter or longer period of time, to transfer dividends or proceeds from such securities out of the country concerned. This risk exists especially in countries where no politically stable conditions exist.

In addition, if the investor wishes to exercise his rights towards the company, he will operate in a foreign jurisdiction and possibly in a foreign language. He may need to use foreign lawyers and courts. This is associated with additional costs and difficulties.

Similarly, it is often more difficult for an investor to obtain the information about foreign stocks. Announcements about general meetings, dividends, etc. are often not published for these shares in the newspapers in the investor’s country of residence. Incomplete, obsolete or missing information can lead to wrong decisions by the investor. Likewise, the evaluation of too much or too little information can lead to errors.

8. Currency risk

Foreign stocks often represent a value in foreign currency. In addition to the risks inherent in the share, the investor also bears the currency risk. Losses may arise or increase solely from the fact that the equity currency is deteriorating against the domestic currency.

9. Risk of delisting

For shares traded on a stock exchange or other generally accessible secondary market (resale market), there is a risk of suspension of trading or even delisting. While in the case of suspension trading is only temporary, delisting permanently removes the company from trading so that the shares can no longer be traded on the stock exchange or another generally accessible secondary market.

10. Liquidity risk

The liquidity of an investment means the possibility of selling it at market prices. Sufficient liquidity is assumed if an investor can sell his investment at any time in a market, without this leading to any noticeable price changes.

Liquidity risk is understood to mean the risk that the investor does not have to sell his investment at the desired time and / or in the desired amount and / or only at considerable markdowns from the market value or does not find a buyer at all.

This risk also often exists with small caps, even when traded on a stock exchange or other publicly available secondary market. The circle of interested parties is often so small that the sale of such shares – if at all – is possible only under bad conditions. In addition, those stocks that have only a narrow market are more prone to price manipulation. In that regard, reference is also made in particular to the comments under item 21. “Risk of price and market determination in narrow markets (over-the-counter markets)”.

11. Risk in a credit-financed investment

Shares are speculative investments. The capital used for acquisition should therefore only be raised by free financial means. Debt financing is not responsible. The Shares are not an appropriate security for borrowing. However, should the investor take out a loan to finance the purchase of shares despite this warning, he must expect that he will not only lose part or all of his investment In addition, the interest and the cost of debt financing must be reduced by the amount of the credit of this amount from other sources of income. The risk of a credit-financed investment in shares thus goes beyond the risk of total loss. Unless the loan, interest and borrowing costs can be derived from other sources of income, there is a risk of personal bankruptcy.

In addition, debt financing often results in losses often exceeding the lending limit for these stocks, requiring the lender to provide additional collateral, or restoring the permissible loan-to-value ratio through forced sale of the stocks at the most unfavourable time.

12. Risk of transaction costs

Transactions (including commissions, fees, brokerage fees, capital taxes) increase the purchase price and reduce the selling price. They reduce the chance of winning and increase the risk of loss. If you trade in the short term, i.e., redeploying your deposit frequently, such costs can not only diminish the odds of winning, but even completely eliminate them, since the accumulation of such transaction costs can completely consume future market profits.

13. Tax and legal risks

The tax treatment of his investment must be clarified by the investor himself. He can not be sure that tax benefits will accrue to him from the execution of the investments. He also has to expect that tax and legal conditions will change. This can also be done during the duration of an investment.

14. Dividend risk

The dividend paid on a share depends heavily on the profits of the company. In low-income years, only a small or no dividend can be paid. The payment of a dividend will be decided every year, so an earlier payment will not guarantee the continued payment of dividends. Even with good performance, this does not necessarily mean an increased dividend.

15. Risk of tracing for protection against loss of assets and voting rights

As part of a capital increase, a stock corporation may issue new shares. Shareholders generally have a subscription right in this case, unless this has been ruled out. By issuing new shares, an existing shareholder must, in exercising his subscription right, subscribe for new shares in proportion to his previous share in the company in order to maintain his former share in the corporation and thus the ratio of his profit share and voting rights. If the existing shareholder has no subscription right or is excluded because of the shares he holds, the existing shareholder must purchase the corresponding number of subscription rights or subscribe for the newly issued shares in order to maintain the ratio of his interest and voting rights. The subscription of shares in the exercise of subscription rights, the subscription of new shares or the purchase of subscription rights entail a renewed capital expenditure on the part of the investor. If the existing shareholder does not provide this renewed capital expenditure, his share in the corporation and thus also the ratio of his profit share and his voting rights will be reduced.

16. Inflation risk

The inflation risk describes the risk of devaluation (reduction of the purchasing power of the investment) during the life of the investment. A depreciation during the life of the investment occurs whenever the inflation rate is higher than the income generated by the investment.

17. Price risk

The stock price of shares traded on the stock exchange or other generally accessible secondary market (resale market) is usually determined several times a day, so there is a risk that the purchase price between the placement of the order and the purchase price will be significantly higher for the acquirer. The same applies in the case of a sale.

18. Transmission risk

Orders must be clear and unambiguous. Unclear and incomplete information may lead to an erroneous execution of the order for the purchase of shares or even result in the order being executed late or not.

19. Stock split

There may also be a so-called stock split, especially for US equities. This is an equity split by a higher number of shares is achieved by a “split” of the shares. In the case of a stock split of 1 to 10, for example, a shareholder who owns one share receives ten additional shares without consideration. However, this is not an issue of bonus shares, as there is a nominal value reduction of the nominal value according to the split ratio. With a € 50,- share the nominal value would be only € 5,-. As a result, the price of the individual share is reduced as a rule.

20. Special risks US Mid Caps

These stocks are subject to all of the above risks. But there are also special risk factors to consider.

20.1. US supervisory rules

In the US, the rule is that all companies offering shares publicly are required to report to the Securities and Exchange Commission (“reporting companies”).Regular annual statements and a wealth of additional information must be submitted. In addition, significant changes within the company must be communicated. Furthermore, the public offering of a share in the US must also be registered with the SEC (registered securities).This registration contains the key investor information about the issue and the issuer. Any information can be obtained from this authority. They are accessible via the Internet.

20.2. Blank check stocks, penny stocks and companies in the development stage

US legislation has two types of companies or emissions that deserve special attention:
Blank check-offers. These are offers in which the issuer does not submit a specific business plan or the plan is to merge or acquire such a company with an unspecified company.
Development Stage Company. These are young companies that are just starting their business or whose business operations are still not generating significant revenues. Closely associated with such companies is the term “penny stocks”. These are equities that are not traded on a US national stock exchange whose net selling price (not face value), i.e. excluding transaction costs, is less than US $ 5.

20.3. Exceptions to the registration requirement

Of the registration and reporting obligations, there are two major exceptions for German investors:

20.3.1. Reduced emissions requirements up to US $ 1 million

It is not necessary for the Issuer to comply with the requirements for a normal registration of the issue with the SEC for the first public offering or public offering of a company’s issues up to a total of US $ 1 million. The Issuer does not have to report to the SEC. For such offers, therefore, less and not verified by the SEC information is available.

However, this exemption is not available for blank check issuances and for companies in the development stage.

20.3.2. Regulation S – Stocks

The second major exception to the registration requirement and, where applicable, the issuer’s reporting requirements are sales of non US equities that meet certain conditions. (So-called Regulations S or Reg S shares). The offer must not be addressed to US persons, i.e. in principle to persons resident in the US. For a period of 12 months, the stock may not be sold to the United States. The buyer must assure that he is not a US person. He must agree to resell the shares only in accordance with these rules. The share certificates must bear the imprint that their transfer is illegal, except in accordance with Regulation S. The issuer must refuse the transfer of an unduly transferred share.

This means that such shares can not be sold in the United States for one year, and above all can not be introduced to US stock exchanges or markets without prior registration with the SEC. This also applies to the over-the-counter and OTC markets mentioned below. At the same time, this means that they can not be introduced on another exchange if there is a risk that they may fall into the hands of the US public before the waiting period expires.

20.3.3. US Securities Markets

In the US, the securities markets are divided into two large groups:

  • Exchanges (including NASDAQ National Market and SmallCap Market)
  • OTC (OTC, over-the-counter markets).

When trading in small caps on the stock exchanges, the general risks for small caps in narrow markets described above apply. In the so-called OTC markets, however, these risks are exacerbated.
The most important OTC markets in the US are

  • the Bulletin Board of NASDAQ
  • the Pink Sheets (Pink Pages) of the National Quotation Bureau, Inc.

The bulletin board is a computer platform for US broker-dealers, where buying and selling prices are quoted and closing prices are quoted. Most of the trade itself takes place over the telephone. Since mid-1999, prices may only be quoted and quoted on the Bulletin Board for companies that report to and are required to report to the SEC or another supervisor. This ensures that these companies provide the investor with the most important information about the company.

The Pink Sheets, which are released on a weekly basis, will quote or disclose prices for those shares that are unable to qualify for trading or listing on a stock exchange or bulletin board. The trade takes place by telephone, more recently probably also via Internet or other communication media.

21. Risk of price and market discovery in narrow markets (over-the-counter markets)

Common to all the over-the-counter markets is that pricing is heavily influenced by the activities of certain broker-dealers (securities trading institutions) who act as market makers, i.e. have informed the organizers (NASDAQ, NQB) that they are particularly concerned about this paper and certain obligations with regard to these papers. In many cases, a stock has only a single market maker, and this is also the only interested party in case the investor wants to sell the stock he has bought. The market makers usually act as proprietary traders. They do not buy and sell the shares on behalf of another client as a broker, but on their own account as a dealer.

The prices are set by them at their own discretion and in their own interest. Here, their remuneration is in the range between the purchase price and the selling price. This range is not as low as in liquid markets, but can be extremely high. Under the same market conditions, i.e. at the same time, the purchase price (in the case of a buyback from the investor) may well be only half the selling price at which the stock is offered to the investors on the market. This equates to a discount of 50% on the selling price and a premium of 100% on the purchase price, without any changes in the market price, income value or asset value of the share.

The absence of a normal supply and demand situation or a general interest and the consequent influence of a few persons on the prices gives the possibility and increases the likelihood of manipulation of the prices to the detriment, in particular, of foreign investors. Such quotations or pricing have little or nothing to do with stock market prices or fair market prices resulting from a normal supply and demand situation.
These problems exist even if there are several market makers for the papers. The prices are then no prices, which are produced by a normal supply and demand situation, but discretionary prices of these dealers, which are provided in their own interest. When quoting prices in these markets, it should also be noted that they are only prices quoted, i.e. prices which are not based on any financial statements or which do not lead to any financial statements or the prices of actual financial statements.

The investor risks to acquire such securities at high arbitrage prices if actively marketed, but these prices as soon as the interest of those responsible for the issue or their distribution and the previous market maker or the previous market makers in the course care, collapse and destroy the alleged deposit value on paper .In these cases, the previous market makers regularly also formally give up their function as market makers, which is possible at any time. In practical terms, the investor has to accept a financial loss in such cases. This risk applies in particular to the above-mentioned blanks or companies in the development stage.

Among the large number of securities offered, there may also be companies that have a sound business and that transform the capital provided by the shareholders into a corresponding asset or reasonable business prospects. The non-professional private investor, who can only partially use the information provided by the SEC’s Reportable Companies Database, relies on coincidence or the advice of competent financial services providers who have analysed the company. However, such advice is only worth something if the advisor is independent of the issuer.
These risks of the price range, which only have to be reflected by a positive development of the company, which must be reflected in the future share price repurchase price, then come from the negative effects of the cost of procurement (agio, commissions), which causes the sales and not the business of the company ,As mentioned above, as in the price range, this is an immediate expense (loss of net assets) of the investor, which must first be compensated by the income or increase in value of a stock before the investment turns out to be positive for the investor.

22. Unavoidability of the aforementioned risks

The aforementioned risks exist in any case. They can not be reduced or avoided. 
These risks can not be ruled out. If someone tells you otherwise, this is not correct.


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