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How to make sure you’re protected as an investor
Nov 04, 2020

Investing in financial products such as shares, bonds, funds and KiwiSaver are ways to increase your wealth over the longer term, though no investment is completely risk-free. While you can’t avoid risk entirely, there are some measures you can take to reduce your risk and make sure you’re protected as an investor.

Investment risks to consider:

Not getting the returns you expect due to inflation - for example, bank deposits losing value as they earn 2% interest, while inflation sits at 3%.
Volatility - market ups and downs are part of investing, but some financial products can be expected to have bigger ups and downs than others.
Losing some or all of your money - if the financial strength or integrity of a company you’re investing in, or a service provider you’re using, is compromised, your investment may be at risk.

Trading in a regulated market

All investments involve risks which mean you could lose money if a company you are investing in performs badly. However, you shouldn’t have to take the same risks on service providers that give you access to those investments, such as brokers, fund managers or exchanges. The risks of suffering loss from the failure of a service provider are reduced by various regulations and oversight by the Financial Markets Authority (FMA), our Government agency responsible for regulating New Zealand’s financial markets. The FMA was established in 2011, in response to a series of company collapses that left tens of thousands of investors out of pocket. By raising standards of behavior, deterring misconduct, and holding to account those who cause harm, the FMA ensures robust financial markets and investor confidence.

The FMA is actually one of four regulators, alongside the Reserve Bank of New Zealand, the Commission for Financial Capability, and the Commerce Commission that oversee aspects of New Zealand’s financial markets. The purpose of these regulatory bodies is to facilitate the development of fair, efficient and transparent financial markets and investment activities.

In 2014, the Financial Markets Conducts Act 2013 (FMC Act) was phased in to lay the foundation for the FMA to provide high-quality regulation in New Zealand. Legislative changes, introduced by the FMC Act, mean investors are now provided with quality information so they can make informed investment decisions – and there are clearer rules for businesses wanting to raise capital.

Investing through a regulated and licensed stock exchange, such as the NZX, means you’re protected, as an investor, by provisions against market manipulation and insider trading. It also means there will be clearly defined requirements for the information that businesses need to disclose, and you will have a licensed market operator actively monitoring the market to ensure it is fair and transparent. Unlicensed venues for trading financial products, by contrast, do not have the same protections and you may not receive the same level of quality information.

Doing your research

One of the most important exercises before making any investment decision is doing your due diligence. You need to ensure you’ve thoroughly understood a business or investment, before investing in it. Making informed investment decisions and understanding the levels of risk involved will help protect you from any surprises.

You can read more on due diligence in our blog post, Doing your due diligence – why it’s important.

Diversifying your investments

We’ve all heard the saying, “Never put all your eggs in one basket.” The same applies to investing and ensuring you have a diversified investment portfolio. Having a diversified portfolio means you have lots of different investments, preferably of different types (for example shares, bonds and property), as well as different sectors of the economy (for example technology, healthcare and agriculture). This helps reduce your risks if there is a downturn in any one business or type of investment. Additionally, a portfolio made up of different kinds of investments will increase your chances of benefiting from an investment that outperforms the rest of the market.

Finding a financial adviser

You don’t need a financial adviser to be an investor – but it can be useful to have one to help you make decisions on investments that are right for you. Most advisers charge a commission, which means you pay them a small percentage of what you invest or what you earn from your investments.

A good starting point to finding a financial adviser is talking to family and friends to see if they have any recommendations. Financial Advice New Zealand lets you search for financial advisers by region, or you can find out more about a particular financial adviser in the public Financial Service Providers Register.

Before talking to a financial adviser, have a read of the FMA’s recommended questions to ask. MoneyHub’s financial adviser guide also provides useful tips.

Red flags to look out for

As an investor, you should take some responsibility for your investment strategy. This means picking up on both good signs and red flags. Good signs include regular disclosures and reporting, and compliance with financial reporting standards.

Red flags include businesses offering returns that seem ‘too good to be true’ or business claiming that there are no risks if you invest with them. You can reduce your risk of falling for investment scams by only investing through reputable New Zealand businesses, regulated by the FMA. Look at who is running the business and their skills and experience.

Anyone operating a financial product market needs to be licensed (unless the market is exempt). A licensed market cannot be operated without market rules, and s328 of the FMC Act sets out what those rules must include. These rules provide some risk mitigation for the investor in that the companies must comply with the rules.

Consider Catalist in your investment strategy

Catalist is designed to be Aotearoa New Zealand’s stock exchange for small and medium-sized businesses, connecting investors with previously inaccessible SME investments. We don’t claim to take the risk out of investing, but we do aim to give investors the confidence they need to make good investment decisions. While our license for the Catalist Public Market is currently pending, as the Government works through some regulatory details, Catalist will be licensed and regulated by the FMA.

Sign up for an investor account with Catalist today to stay updated with any upcoming investment opportunities and updates on the launch of our public market.

By Michelle Polglase