Page 222 - A Canuck's Guide to Financial Literacy 2020

222

they are subject to Know Your Client and suitability requirements that apply to licensed
advisors.

Before you invest in an exempt market security, be aware of the following risks:

▪ Risk of Loss
Exempt market securities are for individuals who have a higher risk tolerance as
there is a chance that you could lose a large portion or all of your investment.
Be aware of the risk factors that come with exempt market securities.
▪ Lack of Disclosure

Exempt market dealers are not obligated to provide interested parties with
detailed information about a particular investment. The individual purchasing
exempt market securities should have enough knowledge themselves and be
able to do research on their own.

▪ No Secondary Market
There is no secondary market for exempt market securities thus making it
difficult to sell. Be aware that these types of securities may have a locked-in
period which may keep you from selling the investment. Many securities are not
publicly traded as well which may force you to hold the security longer than you
wish.

Types of Exempt Securities

Exempt market securities are private capital investments that qualified investors can
purchase in order to add extra diversification into their portfolios. They include a range of
debt and equity instruments such as bonds, mortgages, real estate partnerships, income
funds, labor sponsored funds, oil and gas flow-through shares and hedge funds. Below,
we’ll list the most common type of securities that you might run into in the exempt market.

▪ Hedge Funds

Hedge funds are alternative investments that pool investors’ dollars and invest
them into various financial instruments. Hedge funds try to generate positive
return, regardless of market direction by taking advantage of arbitrage
opportunities, using long and short strategies and utilizing options, to name a
few.

▪ Asset-Backed Securities

Asset backed securities are complex investments that are backed by an
underlying financial asset. These financial assets are a group of illiquid assets
which are unable to be sold individually. Common asset backed securities
include credit card loans, mortgage, loans, auto loans, home equity loans, etc.