Version 1.1 February 2022
When you invest in the stock market, your capital is at risk. You may receive back less than your original investment. This is true whether you invest in stocks, exchange-traded funds (ETFs), exchange-traded commodities (ETCs), investment trusts or any other securities available on our App.
Whenever you invest your money, there is an element of risk to it. Even if you put your cash in a bank account, it is not truly risk-free - if the interest rate is less than inflation, the value of your cash is actually falling.
When you put your cash in a bank account, however, you expect to receive at least the same amount back as you put in (your ‘capital’), provided your bank doesn’t go bankrupt. This is not necessarily true of investments through our App, for which your capital is at risk.
This Risk Disclosure provides a summary of the nature of the risks of the securities you may invest in through our App and of the securities that are on loan. It does not disclose all of the risks and other significant aspects of the investments which we offer.
When you buy a share in a company, you own a part of that company. This means that if the company does well, you are ordinarily entitled to receive any profits it distributes as dividends. It also means that, if the share price has risen since you bought it, you are able to benefit from that increase in value by selling your share.
However, if the company becomes insolvent, it is likely that the value of its shares will fall sharply. A share will usually be delisted from the stock exchange when insolvency becomes likely or when insolvency processes are formally triggered. At this point, it will not be possible to buy or sell any shares you hold in this company on most occasions. Where an insolvency occurs, shareholders will usually rank lowest in the priority for receiving any funds back, meaning that there is a higher risk that you will receive either nothing at all or a fraction of what you invested. If shareholders do receive any funds back following an insolvency, it will typically take a long time for this to be confirmed and for any funds to be received.
The market price of an investment can go down as well as up. Past performance is also not a reliable indicator of future performance. The market price of an instrument is influenced by many factors. These include company performance, economic conditions, market sentiment and news flow.
Prices of shares will sometimes move very quickly and unexpectedly. This includes during times when markets are open for trading, but also there can be large jumps or falls in price between the time at which the market closes on a trading day, and the time it opens on the following trading day.
The movements in prices over time also means that the indicative price you see in-App (based on the latest price point received from our third party data provider) when you place your order will typically vary from the price you receive when that order is executed.
Liquidity risk is the risk that an asset may be difficult to sell at a reasonable price or the risk that it may be difficult to sell the asset quickly, meaning that you are not able to withdraw your money or use it on other investments.
All securities available on our App carry liquidity risk. However, some securities carry higher liquidity risk than others. Typically, more highly traded securities will be more liquid than less traded securities (such as those listed on the London Stock Exchange’s AIM market). Certain ETFs and investment trusts can also suffer lower liquidity at times.
For all securities, there will be a difference between the price you can buy at (the ‘offer’ price) and the price you can sell at (the ‘bid’ price) - the offer price will almost always be higher than the bid price. The difference between these two prices is known as the bid-offer spread. More liquid stocks will have a lower bid-offer spread than less liquid ones. In addition to market fluctuations, this again means that the indicative price you see in-App when you place your order will typically vary from the price you receive when that order is executed.
Liquidity risk may also mean that orders are rejected (because there are no available market participants willing to execute a trade at an acceptable price) and can result in you not being able to buy or sell your securities. Typically these interruptions are short-lived, but for more illiquid securities it can sometimes result in difficulties trading those securities over extended periods.
Where your investments are denominated in currencies other than GBP, fluctuations in foreign exchange rates will impact the market value of your investment, as well as any dividends distributed by the company to shareholders.
Legal actions or changes, including those taken by governments or regulators, can cause risks to the value and ability to sell your investments. This includes regulatory actions to de-list or ban trading of a security, which can lead to you not being able to sell your securities. While such actions are relatively rare, they can be very impactful and unexpected.
Collective investments carry all of the risks described above. However, each ETF, ETC or investment trust carries its own particular risk. It is important to review the Key Information Document (accessible from the Discover screen for relevant securities) before investing. This document provides more information on the features and risks of that security.
While we try to minimise disruptions to our services, there can be instances where access to our services can be interrupted, whether this is caused by a market issue, an external provider or our own systems. As outlined in our terms and conditions, we do not guarantee that our services will always be accessible by you, always available, always functioning properly or error-free.
In these situations, you may not be able to submit orders or your orders may be cancelled. You may also not be able to monitor your positions using our App.
When Freetrade exercises its right to lend your shares, we will then lend those shares to a counterparty (‘borrower’). It is important to remember that when Freetrade lends your shares we will ensure that we have received liquid collateral of greater value in return for the shares lent. You will therefore become the beneficial owner of the collateral until the shares are returned by the borrower.
Securities lending transactions indirectly expose you to counterparty credit risk. This is a risk when a counterparty - in this case, the borrower of your shares - does not fulfil their obligation to return your shares. This could arise because the borrower becomes insolvent. We manage this risk by requiring borrowers to provide collateral that is greater than the value of the shares borrowed. Collateral will take the form of either high quality, liquid assets, like government bonds, or cash.
The value of both the lent shares and the collateral held will move continually, as a result of movements in market prices. We therefore revalue the lent shares and collateral on a daily basis to ensure any value changes are reflected in the total collateral we hold for a transaction. This collateral is held by a third party custodian on behalf of Freetrade customers and is treated as safe custody assets under the applicable FCA rules.
In the unlikely event that the borrower defaults on their obligation to return the securities, Freetrade will take all reasonable measures to return equivalent shares to you.
In an insolvency, the collateral value should be greater than the value of your lent securities, but in a scenario where this was not the case, you may receive back collateral value that is less than the cost of replacing the shares.
The borrower becomes the legal owner of the shares while a loan is open. This means that you will temporarily lose ownership of those securities and any associated rights (i.e. voting rights). Dividends that may be paid while a loan is open will be repaid to Freetrade by the borrower and passed along to you. In some instances there could be a delay in you receiving your dividend for any lent securities.
Other corporate actions will be treated in the same manner as they are currently treated for shares that are not on loan. However, voting rights are held by the borrower during the time that a loan is open.
You remain free to sell your shares at any point. If you do sell some or all of a position that is being lent there are processes and controls in place to recall your shares from the borrower in time to ensure your sale settles in the normal timeframe.
These controls include Freetrade monitoring sale activity throughout the day and looking for opportunities to re-allocate the loan to another Freetrade customer. There could be instances where settlement of your sale is delayed beyond the normal settlement cycle - this will result in you not being able to withdraw those sale proceeds from your account until settlement (as happens today).