How To Make Investment Decisions?

Investment Decisions : When we buy a defective item or one that doesn’t fit our needs, we usually have the option of returning it, but things don’t work the same way with financial products. It is always better to choose well from the beginning and it is not advisable to rush. Therefore, it is advisable to maintain a responsible attitude and follow the necessary steps in making investment decisions:

Steps To Follow To Make An Investment Decision

The steps that are advised to follow to make an investment decision are four.

• Define your investment goals.

It is important to define the objective of your savings, which implies, among other things, determining the term of the investment and the risk that you wish to assume. It is convenient to choose a product that is suitable for the investment horizon that you have, be it short, medium or long term. On the other hand, all financial products carry a certain amount of risk (low, medium, high or very high) that you should be aware of when making the decision to invest in them.

• Find a broker.

Only entities authorized and registered in the public registers of the CNMV can offer investment services. If you receive an offer from an intermediary that you do not know, it is advisable to check the official records to ensure that it is an authorized entity. Alternatively, you can check if it is an entity about which there is a warning for being suspected of offering investment services without being authorized to do so. If the entity you are looking for is not in the official registry of the CNMV, it is advisable that you consult the Investor Service Office before operating with it.

• Choose a product. 

The growing range of financial products provides alternatives for any investment profile. It is essential to understand the characteristics and risks of the product before purchasing it. The degree of complexity of financial products usually goes hand in hand with the risk they carry. The financial institution must explain the characteristics (and risks) of the product that it offers you or that you request. You must provide written information to you in advance of your investment decision so that you can make an informed decision.

• Keep an eye on investments. 

The circumstances under which a particular investment is made may change over the time horizon of the investment. It is advisable to monitor the evolution of the investment and see if the return is as expected or if the risks remain. Financial institutions are required to send information on a regular basis in order to carry out this monitoring.

Ways To Contract A Product

When contracting a product, two situations can be distinguished.

Choose a product directly

In the event that you take the initiative to contact a non-complex product (products that an average investor can understand are considered non-complex), your entity must warn you that you have no obligation to establish whether or not the product is suitable for you and it will just simply execute your buy order. In this case, your financial institution provides you with the “execution only” service (of your order).

However, if you request the purchase of a complex product (products whose characteristics are not easy to understand for an average investor are considered complex), your entity must also ensure that the product is suitable for you by means of a suitability test.

The purpose of the suitability test is for the entity to determine if you, in view of your knowledge and experience as an investor, are capable of understanding the characteristics and risks that you assume when acquiring a specific product. If you have already operated through that entity, they may not need to ask you anything (the entity already has the necessary information about you). This test is the most common. In addition, it must be applied whenever it is the entity that offers the investment.

You may want to invest in a complex product even though you don’t understand it or the risk of the product is greater than the risk you generally take on your investments. In that case, you must sign the acceptance of the product despite not being suitable for you. Be aware of the implications of accepting a higher risk than your profile.

Receive advice from the financial institution

When your entity presents you with several alternative products and recommends one of them, it is providing you with an advisory service. In this case, you must determine which product is the most suitable for you at any given time. To do this, you must collect all the necessary information to be able to advise you. In this sense, the regulations establish that the entity has the obligation to carry out the so-called suitability test.

This test is also mandatory when the entity provides portfolio management services. Through the suitability test, your knowledge and experience, your financial situation, and your investment objectives are assessed.

To know your knowledge and experience with respect to a service or product, the financial entity must obtain information on:

• The types of services, operations, and financial instruments with which you are familiar.
• The nature, volume, and frequency of operations on financial instruments and the period during which they have been carried out.
• The level of training and your profession.
• With this information, you will know if you can understand the product and the risks involved.

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