We believe it is imperative that you
read and fully understand the following
risks of trading and investing:
GENERAL RISKS OF TRADING AND INVESTING
All securities trading, whether in stocks, options, or other investment vehicles,
is speculative in nature and involves substantial risk of loss. We encourage
our subscribers to invest carefully and to utilize the information available
at the websites of the Securities and Exchange Commission at http://www.sec.gov/ and the National Association of Securities
Dealers at http://www.nasd.com/.
You can review public companies filings at the SEC's EDGAR page. The NASD has
published information on how to invest carefully at its website. We also encourage
you to get personal advice from your professional investment advisor and to
make independent investigations before acting on information that we publish.
Most of our information is derived directly from information published by companies
or submitted to governmental agencies on which we analyze and/or rate from other
sources we believe are reliable, without our independent verification. Therefore,
we cannot assure you that the information is accurate or complete. We do not
in any way warrant or guarantee the success of any action you take in reliance
on our statements, ratings, or recommendations.
1. You may lose money trading and investing.
Trading and investing in securities is always risky. For that reason, you
should trade or invest only "risk capital" -- money you can afford
to lose. While this is an individual matter, we recommend that you risk no
more than 10% of your liquid net worth -- and, in some cases, you should risk
less than that. For example, if 10% of your liquid net worth represents your
entire retirement savings, you should not use that amount to buy and sell
securities. Trading stock and stock options involves HIGH RISK and YOU can
LOSE a lot of money.
2. Past performance is not necessarily
indicative of future results.
All investments carry risk and all trading decisions of an individual remain
the responsibility of that individual. There is no guarantee that systems,
indicators, or trading signals will result in profits or that they will not
result in losses. All investors are advised to fully understand all risks
associated with any kind of trading or investing they choose to do.
3. Hypothetical or simulated performance
is not indicative of future results.
Unless specifically noted otherwise, all profit examples provided in the our
websites and publications are based on hypothetical or simulated trading,
which means they are done on paper or electronically based on real market
prices at the time the recommendation is disseminated to the subscribers of
this service, but without actual money being invested. Also, such examples
do not include the costs of subscriptions, commissions, and other fees, or
examples of other recommendations as to which there were losses utilizing
the timing at the time of the recommendations. Because the trades underlying
these examples have not actually been executed, the results may understate
or overstate the impact of certain market factors, such as lack of liquidity
(discussed below). Simulated trading programs in general are also designed
with the benefit of hindsight, which may not be relevant to actual trading.
We make no representations or warranties that any account will or is likely
to achieve profits similar to those shown, because hypothetical or simulated
performance is not necessarily indicative of future results.
4. Don't enter any trade without fully
understanding the worst-case scenarios of that trade.
Trading securities like stock options can be extremely complicated, so make
sure you understand these trades before entering into them. For example, aggressive
positions in options have a greater probability of losing, while less aggressive
positions are less likely to yield substantial profits. Similarly, far out-of-the-money
options are unlikely to finish in the money, and options purchased close to
their expiration dates are very high-risk and, thus, likely to win big or
lose big very quickly. Don't enter any trade without fully understanding the
worst-case scenarios of that trade.
5. We are a financial publisher and do
not provide personalized trading or investment advice.
We are a financial publisher. We publish information regarding companies in
which we believe our subscribers may be interested and our reports reflect
our sincere opinions. However, the information in our publications is not
intended to be personalized recommendations to buy, hold, or sell securities.
As a financial publisher, we are not legally permitted to offer personalized
trading or investment advice to our subscribers. If a subscriber chooses to
engage in trading or investing that he or she does not fully understand, we
may not advise the subscriber on what to do to salvage a position gone wrong.
We also may not address winning positions or personal trading or investing
ideas with subscribers. Therefore, subscribers will need to depend on their
own mastery of the details of trading and investing in order to handle problematic
situations that may arise, including the consultation of their own brokers
and advisors as they deem appropriate.
6. Profits can be lost if they are not
taken at the right time.
Subscribers are advised to take profits at whatever point they deem optimal,
regardless of the profit target set in any given recommendation. Advisory
services such as those we offer provide recommendations. Subscribers are free
to follow the recommendation, follow it in part, or ignore it altogether.
If a subscriber believes a given profit is at risk, the subscriber should
take the profit. Similarly, if a subscriber feels a position is likely to
lose value, or a losing position is likely to fall further, the subscriber
can choose to exit at any time to preserve capital. The final decision as
to when to take profits remains in the sole discretion of the subscriber,
keeping in mind that profits can be lost if they are not taken at the right
RISKS OF FUTURES TRADING
A futures contract is a legally binding agreement between two parties to buy
or sell in the future, on a designated exchange, a specific quantity of a commodity
at a specific price. Because of the volatile nature of the commodities markets
and the use of leverage, trading in futures involves a high degree of risk.
Futures trading is not suitable for many members of the public. Such transactions
should be entered into only by persons who understand the nature and extent
of their rights and obligations under futures contracts and the risks involved
in the transactions covered by those contracts.
1. Because of the impact of leverage, your
losses may exceed the entire amount deposited in your account, or more.
Leverage is the ability to control large amounts of money with much smaller
amounts of risk capital. In futures trading, the amount of money you are required
to deposit is a small percentage of the value of the futures contracts you
trade. If you buy and hold a futures contract, a small positive movement in
price can have a large positive impact on your account; a small negative movement
in price can have a corresponding large negative impact on your account. Therefore,
leverage can work against you as well as for you.
Because of leverage, it is possible to lose all the money in your account
very quickly. Even worse, if the funds in your account fall below the amount
required by the futures broker, you will receive a margin call. A margin call
is a demand from the clearing house to deposit the difference in funds by
the following morning. The difference in funds can be substantial. If you
cannot timely comply with this request, your positions may be liquidated at
a loss and you will be liable for any remaining difference. Keep in mind that
the funds in your account may fall for reasons outside your control. Therefore,
you should manage leverage by limiting your trading as necessary to maintain
sufficient excess margin in your account.
2. Stop orders may reduce, but not eliminate,
your trading risk.
A stop market order is an order, placed with your broker, to buy or sell a
particular futures contract at the market price if and when the price reaches
a specified level. Stop orders are often used by futures traders in an effort
to limit the amount they might lose. If and when the market reaches whatever
price you specify, a stop order becomes an order to execute the desired trade
at the best price immediately obtainable.
There can be no guarantee, however, that it will be possible under all market
conditions to execute the order at the price specified. In an active, volatile
market, the market price may be declining (or rising) so rapidly that there
is no opportunity to liquidate your position at the stop price you have designated.
Under these circumstances, the broker's only obligation is to execute your
order at the best price that is available. Therefore, stop orders may reduce,
but not eliminate, your trading risk.
GENERAL RISKS OF FUTURES OPTIONS TRADING
Buying or selling futures options or stock options is not suitable for many
people, and you should not trade options unless you fully understand the risks,
rights, and obligations of options trading. Use only money you can afford to
lose in options trading.
1. You should not sell options on futures
unless you can meet margin calls and survive large financial losses.
When you buy an option, you risk losing the entire purchase price plus the
commissions paid, but not more since purchasing options on margin is not allowed.
The amount you spend up front is the maximum you can lose. When you sell an
option, you may be required to deposit additional margin if the price of the
commodity moves adversely. You should not sell options unless you can meet
margin calls and survive large financial losses. In cases where the exchange
has difficulty finding buyers, the option seller is subject to the full risk
of the position until the options expire.
SPECIFIC RISKS OF FUTURES OPTIONS TRADING
An option on a commodity futures contract is a legally binding agreement between
two parties which gives the buyer, who pays a market determined price known
as a "premium," the right (but not the obligation), within a specific
time period, to exercise the option. Buying or selling futures options is not
suitable for many people, and you should not trade futures options unless you
fully understand the risks, rights, and obligations of commodities options trading.
1. The futures option, if exercised, will
result in the establishment of a futures position.
Both the purchaser and grantor of an option on a futures contract should realize
that the option, if exercised, will result in the establishment of a futures
position, subject to all the risks such contracts carry (see above). The buyer
of a call option will be assigned a long position in the underlying futures
if exercised, while the buyer of a put option will be assigned a short position
in the underlying futures if exercised. The purchaser of an option should
be aware that some option contracts provide for only a limited period of time
during which an option may be exercised.
2. You may be unable to liquidate your
position because of lack of liquidity in the futures or options market.
Exchange trading mechanics are designed to provide for competitive execution
and to make available to buyers and to sellers a continuous market in which
an option once purchased can later be sold; and in which an option, once granted,
can later be liquidated by an offsetting purchase. Although each exchange's
trading system is designed to provide market liquidity for the options traded
on that exchange, there can be no assurance that a liquid offset market on
the exchange will exist for any particular option, or at any particular time,
and for some options, no offset market on that exchange may exist at all.
In such an event, it may not be possible to effect offsetting transactions
in particular options. Thus, to realize any profit, a holder will have to
exercise their option and have to assume all risks and to comply with margin
requirements for the underlying futures contracts or, in the event of an option
on a physical commodity, incur the costs and risks of holding the physical
good. A grantor could not terminate its obligation until the option expired
or the grantor was assigned an exercise notice. You may exercise your option
but be unable to liquidate your resulting futures position because of daily
price limits or lack of liquidity in the futures market.
3. Lack of pricing limits on some options.
The trader should be aware that an option may not be subject to daily price
fluctuation limits even if the underlying futures position has such limits
and, as a result, normal pricing relationships between options and the underlying
futures may not exist. Also, futures positions assigned as a result of an
expiring option may not be capable of being offset if the underlying futures
contract is at a price limit.
4. Additional risks of writing or granting
The grantor of a call option who does not have a long position in the underlying
futures contract (i.e. a "naked" sale or short) is subject to risk
of loss should the price of the underlying futures be higher than the strike
price of the option, and this loss may exceed the premium received for the
initial sale of the call option. The grantor of a call option who has a long
position in the underlying futures (i.e. a "covered" sale or short)
is subject to the risk of decline in price of the underlying futures, less
the premium received for granting the call option. In exchange for the premium
received, the call option grantor gives up all of the potential gain resulting
from an increase in the price of the underlying futures above the strike price
of the option. The grantor of a put option who does not have a short position
in the underlying futures contract (i.e. a "naked" sale or short)
is subject to risk of loss should the price of the underlying futures be below
the strike price of the option, and this loss may exceed the premium received
for the initial sale of the put option. The grantor of a put option who has
a short position in the underlying futures (i.e. a "covered" sale
or short) is subject to the risk of a rise in price of the underlying futures,
less the premium received for granting the put option. In exchange for the
premium received, the put option grantor gives up all of the potential gain
resulting from a decrease in the price of the underlying futures below the
strike price of the option.
RISKS OF INVESTING IN STOCK
Investments always entail some degree of risk. Be aware that:
1. Some investments in stock cannot easily be sold or converted
to cash. Check to see if there is any penalty or charge if you must sell an
2. Investments in stock issued by a company with little
or no operating history or published information involves greater risk than
investing in a public company with an operating history and extensive public
information. There are additional risks if that is a low priced stock with
a limited trading market, e.g., so-called penny stocks.
3. Stock investments, including mutual funds, are not federally
insured against a loss in market value.
4. Stock you own may be subject to tender offers, mergers,
reorganizations, or third-party actions that can affect the value of your
ownership interest. Pay careful attention to public announcements and information
sent to you about such transactions. They involve complex investment decisions.
Be sure you fully understand the terms of any offer to exchange or sell your
shares before you act. In some cases, such as partial or two-tier tender offers,
failure to act can have detrimental effects on your investment.
The greatest risk in buying shares of stock is having the value of the stock
fall to zero. On the other hand, the risk of selling stock short can be substantial.
"Short selling" means selling stock that the seller does not own,
or any sale that is completed by the delivery of a security borrowed by the
seller. Short selling is a legitimate trading strategy, but assumes that the
seller will be able to buy the stock at a more favorable price than the price
at which they sold short. If this is not the case, then the seller will be
liable for the increase in price of the shorted stock, which could be substantial.
SPECIFIC RISKS OF STOCK OPTIONS TRADING
When you open a stock option account, you should receive a booklet entitled
"Characteristics and Risks of Standardized Options," which is also
available on the Chicago Board Options Exchange website at http://www.cboe.com/resources/intro.asp.
This booklet contains an in-depth discussion of the characteristics and risks
associated with stock options trading. We strongly encourage you to carefully
read and understand this information.
1. Assignment of exercise to writers.
As a writer of a stock option, you may be assigned an exercise at any time
from the date of sale through approximately two days after the date of expiration.
The consequences of being assigned an exercise depend upon whether the writer
of a call is covered or uncovered, as discussed below. Since an option writer
may not be informed of the assignment of exercise until up to two days after
expiration, special risks can come into play. For example, an option writer
who sells out their underlying position upon expiration may find out the next
day that they have to surrender stock they do not now own.
2. Risk of unlimited losses for uncovered
writers of call options.
A "naked" or uncovered writer of a call option is at substantial
risk should the value of the underlying stock move unfavorably against the
position. For a naked call writer, the risk of loss is theoretically unlimited.
The obligation of a naked writer that is not secured by cash to meet applicable
margin requirements creates additional risks. A harsh adverse move in stock
prices can create steep margin call scenarios in which a brokerage firm may
liquidate other holdings in the writer's account(s) to cover the option. Since
pricing of options tends to be magnified relative to the underlying stock,
the naked writer may be at significantly greater risk than a short seller
of the underlying stock.
3. Deep out-of-the-money options carry
high risk of loss.
Although purchasing stock options at strike prices significantly above or
below the current market price can be very inexpensive, you are at high risk
of losing your money. There are two versions of deep out-of-the-money options:
- A deep out-of-the-money call is an option to purchase 100 shares of stock
at a price far above the current market price.
- A deep out-of-the-money put is an option to sell 100 shares of stock at
a price far below the current market price.
Although these options seem inexpensive, the chances of making a profit on
such transactions are extremely low. Therefore, novice traders should avoid
buying deep out-of-the-money options.
4. Out-of-the-money options near their
expiration date carry a high risk of loss.
The closer you buy an out-of-the-money option to its expiration date, the
less likely it is to end up profitable. Although these options are cheap,
in order to win in such situations, you will need precise timing and the occurrence
of a major event that significantly moves the underlying future in your favor.
Therefore, the risk associated with these options is high and you are likely
to lose your entire investment in these positions.
Each advisory service we provide will offer a special discussion of risks.
As you move through the educational materials that teach you how to use each
service, be sure to carefully read the risks section. It elaborates on risks
specific to the types of recommendations you might see in that service. Do
not enter any trade without understanding all risks associated with that type
Once again, we stress the importance of understanding all of the risks of
any form of trading or investing that you choose to do. One should fully understand
the worst-case scenario prior to trading or investing real dollars. Past performance
is not necessarily indicative of future results. You take full responsibility
for all trading actions, and should make every effort to understand the risks