before you invest
There are many investments which are complex and difficult to
understand (even for experienced investors). Here we provide a
brief overview of some of these high-risk products. We recommend
you seek professional financial advice before you invest in
any of these products.
Collateralised debt obligations
A CDO is a security that consists of a bundle of
individual loans and other debts that have been packaged up
together. They include debts with mixed creditworthiness, such as
mortgages, car loans, credit card debt and corporate debt or
They are called 'collateralised' because they are backed by some
type of asset (collateral). When you buy a CDO you take
on the risk that the initial loans will not be repaid and receive
interest payments in return.
CDOs range from reasonably secure to highly risky. These are the
products that triggered the global financial crisis.
Foreign exchange trading
Foreign exchange trading is where you buy and sell foreign
currencies to try to make a profit. See our forex
page for information about how to trade currencies and the
Futures and options
Futures are contracts to buy or sell a particular asset (or cash
equivalent), at a specific price, on a specific date in the future.
For example, a company may use a futures contract to lock in the
price of a foreign currency it needs to buy at some future date.
Futures are also widely used for speculative trading. They can be bought
and sold on the Australian Securities Exchange (ASX).
A futures contract is legally binding, no matter what the market
value of the asset is when the contract matures. This means either
the buyer or the seller of a futures contract can potentially face
Try the ASX's futures course if you want to find out
Options are contracts between two parties that give the buyer
the option to buy or sell a particular asset, at a set price, on or
before a specified future date. The seller keeps the money paid for
the option, even if the buyer doesn't exercise their rights. If you
buy an option but don't exercise your right to buy or sell the
asset by the due date, it expires and becomes worthless.
Selling an option can be very risky, especially if you don't
already own the underlying asset. If the market price rises above
the 'exercise' price you may be forced to buy at the market price
and immediately sell at the lower 'exercise' price, incurring an
immediate loss. Options can be bought and sold on the ASX.
Try the ASX's options course if you want to find out
Binary options are a type of option where you try to
predict the short-term movements of a share price, currency, index
or commodity. They are high-risk products. For more information,
are investments that, like managed funds, use pooled funds to invest
in alternative assets or strategies. These strategies tend to be
more complex than traditional managed funds and may include the use
of derivatives and leverage in both domestic and
international markets. Many hedge funds aim to profit in both
rising and falling markets.
Hedge fund returns may have a low correlation with more
traditional assets, such as shares and bonds, which can make them a good way to
diversify a portfolio.
Hybrid securities and
Hybrid securities are a way
for banks and companies to borrow money from investors in return
for interest payments. They are offered by banks and large
companies and combine features of both debt (fixed
interest) and equity (shares). Each investment has its
own terms and conditions, timeframe and interest rates. They can
usually be traded on a secondary market such as the ASX.
An infrastructure investment is an investment in a registered
managed investment scheme or infrastructure company, that invests
your money in projects like roads, railways, ports, airports,
telecommunications facilities, electricity generation, gas or
electricity transmission or distribution, water supply, sewerage or
These investments are usually listed on a public market such as
the ASX. Investors can also access a small number of unlisted
companies and unlisted unit trusts by dealing
directly with the entity. Unlisted entities are less liquid than some investments, which could
limit your ability to withdraw your money when you need it.
See ASIC's guide to Investing in infrastructure.
Investment and insurance
An investment bond, also
known as an insurance bond or growth bond, is an investment offered
by an insurance company or friendly society. It is technically a life insurance
policy, that also has features similar to a managed fund.
It's a long-term investment, designed to be held for at least 10
years and can be very tax-effective, providing you follow the
contribution and withdrawal rules.
security is an investment with two parts that can't be
separated from each other. For example, a listed property trust investment stapled
to shares in the company that manages the property trust. The trust is the legal
owner of the property assets. The related company manages the fund
and development opportunities, for a fee.
Advice from Paul Clitheroe
complex investment products are extremely risky' advises Paul
'Contracts for difference, collateralised debt
obligations, futures and options are all potential minefields.
People buy them because they think they can make a lot of money
quickly. The reality is they could lose money quickly.
'These products are incredibly complex to understand, even for
an experienced investor like me. If you are considering buying
these products, think of how much you can afford to lose, not just
how much you hope to gain.'
Paul Clitheroe is Chairman of Money Magazine and the Australian
Government Financial Literacy Board
Some complex products attract investors looking
to make a quick buck or those looking for higher than usual
returns. This may seem tempting, but remember, higher returns carry
higher risk, so read investment documents carefully and consider
how they fit into your overall investment plan.
Last updated: 12 Dec 2018