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Questions and Answers on Basic Investment Principles


Last updated: 4 January 2019

 

 A - GENERAL INVESTMENT PRINCIPLE

An investment decision should be well-informed and thought out clearly. Before selecting what type of investment application to use for investing savings, an investor should take the following recommendations into account: 
  • be informed
  • think the decision through
  • make an investment plan
  • diversify options and invest progressively
  • know the costs involved
  • avoid borrowing 

B - SECURITIES ACCOUNT

1 - What is a securities account?

A securities account is an account whereby the financial intermediary receives orders on financial instruments (buy, sell, subscribe, redemption) from investors. Book-entry securities/financial instruments are registered in the securities account (shares, bonds, investment fund units, etc.), i.e. the securities represented by computer records in the account (and not by paper). 

 

2 - What is a financial intermediation contract?

Opening a securities account requires a financial intermediation contract which is legally subject to the written form. The financial intermediation contract shall contain, among other elements, the description of the services to be provided (as well as the identification of the financial instruments of the services to be provided), the rights and duties of the parties and the manner in which they may claim. 


C - PROFESSIONAL/RETAIL INVESTOR

3 - What is a professional investor?

Professional investors are entities listed in the Securities Code, such as:

  • Credit institutions;
  • Investment companies;
  • Insurance companies;
  • Collective investment institutions and their respective management companies;
  • Pension funds and their respective management entities.

4 - What is a retail investor?

Retail investors are investors that do not meet the necessary requirements to be classified as professional investors and are commonly referred to as retail investors. Retail Investors benefit from a higher degree of protection with respect to:

  • Provided information (before and after the supply of the service);
  • The suitability assessment of the marketed financial instruments to that of the investor's profile (adequacy test).


5 - May the retail investor request that his/her financial intermediary reclassify him/her as a professional investor?

Yes, provided that:

  • The request is made in writing from his/her financial intermediary;
  • Meet at least two of the following requirements: 
      • Have performed 10 operations with significant volume, per quarter, over the past four quarters;
      • Have a portfolio of financial instruments of more than € 500,000 including cash deposits;
      • Have at least one year's professional experience in the financial sector in a position requiring knowledge of the services or operations concerned.

D - SUITABILITY OF THE FINANCIAL PRODUCT TO THE INVESTOR PROFILE

6 - What does the financial intermediary need to do to know whether a specific product is suitable for their client?

The financial intermediary shall ask each client for information on their investment knowledge and experience, to enable them to assess whether the client understands the risks involved.

The information shall include the following:

  • The type of operations and instruments that the client is familiar with;
  • Nature, volume and frequency of transactions in financial instruments and the period wherein they were carried out;
  • Education level, profession and previous relevant profession.
Prior to the providing portfolio management and advisory services, the financial intermediary shall also ask the investor for information on their financial situation and investment objectives in order to assess their risk profile. If the financial intermediary considers the transaction to be inappropriate based on the collected information, the financial intermediary must advise the investor in writing.


7 - What information and characteristics should be considered to typify the investor?

  • Age
  • Academic qualifications
  • Higher or lower risk aversion
  • Availability for short, medium or long-term application
  • Knowledge of financial products

8 - What are the different types of risk profiles?

There is no legal definition for the different investment profiles.  However, the most common definitions for the various investor types are as follows: 

  • Conservative or sensible
  • Balanced or moderate
  • Bold or aggressive

9 - Even if the investment was found to be inappropriate for an investor's profile, may the investor still subscribe it?

Within the scope of the reception and transmission of orders service, the financial intermediary, based on the information collected, and taking into account the investor's knowledge and capacity, assesses the suitability of the transaction to the investor profile. If the financial intermediary considers that the transaction in question does not fit the investor's profile, the financial intermediary must advise the investor in writing accordingly. In this case, the investor may choose, even if warned of the inadequacy, to make the intended investment. 


E – PRECAUTIONS TO BE TAKEN BEFORE INVESTING

10 - What type of information should the investor be knowledgeable about before investing?

The investor must be informed of the following:

  • characteristics of financial instruments (type of financial instrument, start date, date and method of reimbursement, interest/dividend payment date, method of calculating return on investment);

  • risks (market, capital, credit, counterparty, interest rate, exchange rate, liquidity and legal/tax);

  • commission fees pertaining to the securities account, subscription, reimbursement, redemption and/or payment of interest/dividends);
  • how to divest (early repayment, sale, exchange);
  • any conflicts of interest (e.g. of the intermediary, issuer, trader).

11 - What main risk should be taken into account before investing?

  • Venture Capital – the risk that the amount receivable by the investor will be less than the capital invested; 

  • Market Risk – risk that the value of the assets or underlying assets in the case of Complex Financial Products will vary and this will impact the return on investment;
  • Credit risk – risk that the issuer may go bankrupt or file for insolvency;
  • Liquidity Riskrisk of having to wait or incur in costs to turn a given financial instrument into currency. 

12 - What precautions should be considered when trading on electronic platforms? 

With technological development and the spread of internet access, there are increasingly more intermediaries that via the internet, allow access to software that enables the trading of different financial instruments, usually called electronic platforms. The entity responsible for providing a particular platform, may be a financial intermediary registered in Portugal or in an EU member state, without physical representation in Portugal (acting under the freedom to provide services).

  • Verify whether the company is duly authorised and registered with the CMVM;

  • Be cautious of the potential risks of distance investment; 

  • Be wary of promises of high, easy and/or instant returns;

  • High returns have high risks;

  • Be especially careful when asked to provide your credit card details;

  • Also be aware of the circumstance where you may require margin tightening and/or unilaterally closing positions and consider whether you are available to comply with these rules. The margin mechanism may lead to the loss exceeding the invested capital. 

13 - What importance is given to your signature in the subscription documents?

The signature of the subscription documents, such as the subscription form or a market order, constitutes proof of the investor's consent to the acceptance of the statements contained therein, so that all information contained therein should be read prior to the investment.


14 - Where is one able to verify whether a financial intermediary is registered with the CMVM?

On the CMVM website. For registered financial intermediaries, consult here and those that provide services under the freedom to provide services act, here.


F - COSTS

15 - Where might one consult information on the costs associated with one's investment?  

  •  in the price list that is compulsorily made available by its financial intermediary;
  • the documentation associated with the subscription of the financial instruments to be acquired.
The CMVM makes available on its website, for information purposes only, a cost calculator. (contents only available in Portuguese).

16 - What are the main types of fees?

  • Transaction fee
    Payment of the reception, transmission or execution or a purchase or sale order given by the investor.
  • Registration and deposit fee
    Payment for the registration and deposit service of financial instruments in each investor's account (also called the custody fee or safekeeping fee).
  • Fee on transfer of financial instruments between accounts
    Payment for the transfer of financial instruments registered in an investor's account to another account.
  • Dividends/Interest payment fee
    Payment for the deposit into the investor's account of the amount of dividends/interest corresponding to the shares/bonds owned.
  • Corporate events commission
    Payment of the investor's exercise of rights of the securities held, such as participation in capital increaseS, company spin-offs or mergers.  
  • Subscription and redemption fee
    Cost paid by the investor at the beginning and end of the investment. For some funds, redemption fees depend on how long the participant has held the units (IUs).