TABLE OF CONTENTS As explained in Chapter 14, certificates of securitized equities are derivative financial instruments sold by their issuers as structured products. These instruments are complex and they involve a high degree of exposure. Theoretically, they are intended for sale only to investors capable of understanding and assuming the risks involved. Practically, they are sold to everybody.
Therefore, before entering into any transaction involving the purchase of equity-type derivatives, the investor should fully consider the suitability of that transaction to his or her particular circumstances and financial position, including risk appetite. The investor would also be well advised to review independently the specific financial exposure involved in securitized equities, as well as the legal, regulatory, credit, accounting and tax consequences embedded in these instruments.
What the previous paragraphs have stated are 'musts', and they are by no means the issues that a salesperson of equity derivatives would raise in trying to close a deal. Rather, the issuer's or salesperson's questions to the buyer will be: 'Are you an equity investor?' 'Do you expect share prices to rise?' Would you like to profit from the performance of a number of companies with just a modest investment?' All these are queries designed to elicit a 'yes' answer. They can also be traps.
Usually, the buyer will be told that by purchasing a certificate of equity derivatives he or she will be investing in an equity portfolio that is structured in the form of a security, without specifying the exposure this instrument involves...
