risk disclosure document for capital market and derivatives segments (rdd) :
This document contains important information on trading in Equities / Derivatives
Segments of the stock exchanges. All prospective constituents should read this document
before trading in Equities/ Derivatives Segments of the Exchanges. Stock exchanges
/ SEBI does neither singly or jointly and expressly nor impliedly guarantee nor
make any representation concerning the completeness, the adequacy or accuracy of
this disclosure document nor have Stock exchanges / SEBI endorsed or passed any
merits of participating in the trading segments. This brief statement does not disclose
all the risks and other significant aspects of trading. In the light of the risks
involved, you should undertake transactions only if you understand the nature of
the relationship into which you are entering and the extent of your exposure to
You must know and appreciate that trading in Equity shares, derivatives contracts
or other instruments traded on the Stock Exchange, which have varying element of
risk, is generally not an appropriate avenue for someone of limited resources /
limited investment and/or trading experience and low risk tolerance. You should
therefore carefully consider whether such trading is suitable for you in the light
of your financial condition. In case you trade on Stock exchanges and suffer adverse
consequences or loss, you shall be solely responsible for the same and Stock exchanges
/ its Clearing Corporation and / or SEBI shall not be responsible, in any manner
whatsoever, for the same and it will not be open for you to take a plea that no
adequate disclosure regarding the risks involved was made or that you were not explained
the full risk involved by the concerned stock broker.
The constituent shall be solely responsible for the consequences and no contract
can be rescinded on that account. You must acknowledge and accept that there can
be no guarantee of profits or no exception from losses while executing orders for
purchase and / or sale of a derivative contract being traded on Stock exchanges.
Stock exchanges does not provide or purport to provide any advice and shall not
be liable to any person who enters into any business relationship with any stock
broker of Stock exchanges and / or any third party based on any information contained
in this document. Any information contained in this document must not be construed
as business advice. No consideration to trade should be made without thoroughly
understanding and reviewing the risks involved in such trading.
If you are unsure, you must seek professional advice on the same. In considering
whether to trade or authorize someone to trade for you, you should be aware of or
must get acquainted with the following:-
Risk of Higher Volatility
Volatility refers to the dynamic changes in price that a security / derivatives
contract undergoes when trading activity continues on the Stock Exchanges. Generally,
higher the volatility of a security / derivatives contract, greater is its price
swings. There may be normally greater volatility in thinly traded securities / derivatives
contracts than in active securities / derivatives contracts. As a result of volatility,
your order may only be partially executed or not executed at all, or the price at
which your order got executed may be substantially different from the last traded
price or change substantially thereafter, resulting in notional or real losses.
Risk of Lower Liquidity
Liquidity refers to the ability of market participants to buy and / or sell securities
/ derivatives contracts expeditiously at a competitive price and with minimal price
difference. Generally, it is assumed that more the numbers of orders available in
a market, greater is the liquidity. Liquidity is important because with greater
liquidity, it is easier for investors to buy and/or sell securities / derivatives
contracts swiftly and with minimal price difference, and as a result, investors
are more likely to pay or receive a competitive price for securities / derivatives
contracts purchased or sold. There may be a risk of lower liquidity in some securities
/ derivatives contracts as compared to active securities / derivatives contracts.
As a result, your order may only be partially executed, or may be executed with
relatively greater price difference or may not be executed at all.
- Buying or selling securities / derivatives contracts as part of a day trading strategy
may also result into losses, because in such a situation, securities / derivatives
contracts may have to be sold / purchased at low / high prices, compared to the
expected price levels, so as not to have any open position or obligation to deliver
or receive a security / derivatives contract.
Risk of Wider Spreads
Spread refers to the difference in best buy price and best sell price. It represents
the differential between the price of buying a security / derivatives contract and
immediately selling it or vice versa. Lower liquidity and higher volatility may
result in wider than normal spreads for less liquid or illiquid securities / derivatives
contracts. This in turn will hamper better price formation.
The placing of orders (e.g., "stop loss” orders, or "limit" orders) which are intended
to limit losses to certain amounts may not be effective many a time because rapid
movement in market conditions may make it impossible to execute such orders.
- A "market" order will be executed promptly, subject to availability of orders on
opposite side, without regard to price and that, while the customer may receive
a prompt execution of a "market" order, the execution may be at available prices
of outstanding orders, which satisfy the order quantity, on price time priority.
It may be understood that these prices may be significantly different from the last
traded price or the best price in that security / derivatives contract.
- A "limit" order will be executed only at the "limit" price specified for the order
or a better price. However, while the customer receives price protection, there
is a possibility that the order may not be executed at all.
- A stop loss order is generally placed "away" from the current price of a stock /
derivatives contract, and such order gets activated if and when the security / derivatives
contract reaches, or trades through, the stop price. Sell stop orders are entered
ordinarily below the current price, and buy stop orders are entered ordinarily above
the current price. When the security/derivatives contract reaches the pre-determined
price, or trades through such price, the stop loss order converts to a market /
limit order and is executed at the limit or better. There is no assurance therefore
that the limit order will be executable since a security / derivatives contract
might penetrate the pre-determined price, in which case, the risk of such order
not getting executed arises, just as with a regular limit order.
Risk of News Announcements
News announcements that may impact the price of stock / derivatives contract may
occur during trading, and when combined with lower liquidity and higher volatility,
may suddenly cause an unexpected positive or negative movement in the price of the
security / contract.
Risk of Rumors
Rumors about companies / currencies at times float in the market through word of
mouth, newspapers, websites or news agencies, etc. The investors should be wary
of and should desist from acting on rumors.
High volume trading will frequently occur at the market opening and before market
close. Such high volumes may also occur at any point in the day. These may cause
delays in order execution or confirmation.
- During periods of volatility, on account of market participants continuously modifying
their order quantity or prices or placing fresh orders, there may be delays in order
execution and its confirmations.
- Under certain market conditions, it may be difficult or impossible to liquidate
a position in the market at a reasonable price or at all, when there are no outstanding
orders either on the buy side or the sell side, or if trading is halted in a security
/ derivatives contract due to any action on account of unusual trading activity
or security / derivatives contract hitting circuit filters or for any other reason.
system / network congestion
Trading on exchanges is in electronic mode, based on satellite / leased line based
communications, combination of technologies and computer systems to place and route
orders. Thus, there exists a possibility of communication failure or system problems
or slow or delayed response from system or trading halt, or any such other problem
/ glitch whereby not being able to establish access to the trading system / network,
which may be beyond control and may result in delay in processing or not processing
buy or sell orders either in part or in full. You are cautioned to note that although
these problems may be temporary in nature, but when you have outstanding open positions
or unexecuted orders, these represent a risk because of your obligations to settle
all executed transactions.
As far as Derivatives segments are concerned, please note and get yourself acquainted
with the following additional features
Effect of "Leverage" or "Gearing
In the derivatives market, the amount of margin is small relative to the value of
the derivatives contract so the transactions are 'leveraged' or 'geared'. Derivatives
trading, which is conducted with a relatively small amount of margin, provides the
possibility of great profit or loss in comparison with the margin amount. But transactions
in derivatives carry a high degree of risk. You should therefore completely understand
the following statements before actually trading in derivatives and also trade with
caution while taking into account one's circumstances, financial resources, etc.
If the prices move against you, you may lose a part of or whole margin amount in
a relatively short period of time. Moreover, the loss may exceed the original margin
- Futures trading involve daily settlement of all positions. Every day the open positions
are marked to market based on the closing level of the index / derivatives contract.
If the contract has moved against you, you will be required to deposit the amount
of loss (notional) resulting from such movement. This amount will have to be paid
within a stipulated time frame, generally before commencement of trading on next
- If you fail to deposit the additional amount by the deadline or if an outstanding
debt occurs in your account, the stock broker may liquidate a part of or the whole
position or substitute securities. In this case, you will be liable for any losses
incurred due to such close-outs.
- Under certain market conditions, an investor may find it difficult or impossible
to execute transactions. For example, this situation can occur due to factors such
as illiquidity i.e. when there are insufficient bids or offers or suspension of
trading due to price limit or circuit breakers etc.
- In order to maintain market stability, the following steps may be adopted: changes
in the margin rate, increases in the cash margin rate or others. These new measures
may also be applied to the existing open interests. In such conditions, you will
be required to put up additional margins or reduce your positions.
- You must ask your broker to provide the full details of derivatives contracts you
plan to trade i.e. the contract specifications and the associated obligations
currency specific risks
- The profit or loss in transactions in foreign currency-denominated contracts, whether
they are traded in your own or another jurisdiction, will be affected by fluctuations
in currency rates where there is a need to convert from the currency denomination
of the contract to another currency.
- Under certain market conditions, you may find it difficult or impossible to liquidate
a position. This can occur, for example when a currency is deregulated or fixed
trading bands are widened.
- Currency prices are highly volatile. Price movements for currencies are influenced
by, among other things: changing supply-demand relationships; trade, fiscal, monetary,
exchange control programs and policies of governments; foreign political and economic
events and policies; changes in national and international interest rates and inflation;
currency devaluation; and sentiment of the market place. None of these factors can
be controlled by any individual advisor and no assurance can be given that an advisor's
advice will result in profitable trades for a participating customer or that a customer
will not incur losses from such events.
Risk of Option holders
- An option holder runs the risk of losing the entire amount paid for the option in
a relatively short period of time. This risk reflects the nature of an option as
a wasting asset which becomes worthless when it expires. An option holder who neither
sells his option in the secondary market nor exercises it prior to its expiration
will necessarily lose his entire investment in the option. If the price of the underlying
does not change in the anticipated direction before the option expires, to an extent
sufficient to cover the cost of the option, the investor may lose all or a significant
part of his investment in the option.
- The Exchanges may impose exercise restrictions and have absolute authority to restrict
the exercise of options at certain times in specified circumstances.
Risks of Option Writers
- If the price movement of the underlying is not in the anticipated direction, the
option writer runs the risks of losing substantial amount.
- The risk of being an option writer may be reduced by the purchase of other options
on the same underlying interest and thereby assuming a spread position or by acquiring
other types of hedging positions in the options markets or other markets. However,
even where the writer has assumed a spread or other hedging position, the risks
may still be significant. A spread position is not necessarily less risky than a
simple 'long' or 'short' position.
- Transactions that involve buying and writing multiple options in combination, or
buying or writing options in combination with buying or selling short the underlying
interests, present additional risks to investors. Combination transactions, such
as option spreads, are more complex than buying or writing a single option. And
it should be further noted that, as in any area of investing, a complexity not well
understood is, in itself, a risk factor. While this is not to suggest that combination
strategies should not be considered, it is advisable, as is the case with all investments
in options, to consult with someone who is experienced and knowledgeable with respect
to the risks and potential rewards of combination transactions under various market
trading through wireless technology/ smart order routing or any other technology
Any additional provisions defining the features, risks, responsibilities, obligations
and liabilities associated with securities trading through wireless technology/
smart order routing or any other technology should be brought to the notice of the
client by the stock broker.