Special risks of share options


There are special features for some share options that differentiate them from other futures transactions and must be noted. It should be noted that a share option always relates to a particular share. Therefore the information on the share and its dividends must be noted. Consider whether it is a standard or second-tier stock. In addition, the public limited company's corporate data and its development should be considered. News relating to the company could also have sustained effects on the option. The price of the share option is namely determined to a high extent by the price of the relevant share. So changes to the share price may produce over-proportional changes in the price of the option.


Corporate risk - credit risk

If you hold physical shares you provide capital to the public limited company. You therefore bear part of the public limited company's business risk. In extreme cases, i.e. the company's insolvency, this could also mean losing the complete share (insolvency or bankruptcy risk).


Rate risk

Share transactions are subject to a rate change risk. Share prices have unpredictable variations. The price movements are affected to a large extent by the company's economic development. Here both general environmental conditions (macroeconomic, currency and monetary policy) and specific conditions (wage dispute, unfavourable market development in the industry etc.) could have important effects on the development of the price.


Liquidity risk

The liquidity risk is the risk that the share transaction (purchase or sale) can not be processed quickly, easily and at market prices. Difficulties when processing share transactions may be due to tight and illiquid funds in which no or only low transactions take place and in which the implementation of the share transactions is not possible or only in part or only at less favourable conditions. In particular for so-called subsidiary values and foreign titles there may be no or only an inadequate market for selling the shares. This can result in difficulties for a sale such that it is not possible to find a buyer or only at a very reduced price. In addition, individual countries or the structure of the securities themselves may envisage restrictions on the ability to trade such that intermediate financing may be necessary to cover short-term liquidity needs.


Psychological market risk

Prices on the stock exchange are not only determined by objective factors as they substantially depend on the opinion of market participants, but rather also by subjective factors. The share price includes all of the market participants' hopes and fears. Such irrational factors as, for example, sentiment, opinions and rumours may result in important falls in prices that do not agree with the company's objective data or reinforce existing developments.


Economic risk

The development of the investments is also affected by the development of the economy. There are various economic cycles that should be considered when deciding to invest. There is the risk of rate losses if the investor does not consider or incorrectly considers economic development in his decision as the development of share prices is affected by economic development.


Currency risk

If the share is listed in a foreign currency there is also an additional currency risk from the resulting exchange rate fluctuations.


Dividend risk

The dividend paid on a share depends heavily on the profits generated by the company. In years when profit is weak only low or no dividends can be paid. A decision is made afresh each year on the payment of a dividend, so payment in one year is no guarantee for the payment of future dividends. Even if development is good this does not necessarily result in higher dividends.


Country risk

Country risk refers to the risk that a foreign debtor (e.g. public limited company) is able to pay but in spite or its own willingness to pay is not able to pay its dividends or other payments on time or at all due to its inability to make the transfer or a lacking of willingness in its home country. This may be the case due to economic or political uncertainty or also due to relevant sovereign measures (e.g. foreign currency regulations).


Share splitting

There may be so-called share splitting, especially for American shares. This is a share split in which a larger number of shares are produced by "splitting" the shares. For example, in a 1 to 10 share split, a shareholder with 1 share receives 10 additional shares without payment. This does not mean issuing free shares because for par-value shares the par-value is reduced in the same ratio as the split. For a share that has a par value of EUR 50.00 it would then only have a value of EUR 5.00. In general the price of the individual share reduces to match.

This splitting then has effects on the existing share options. The number of options is then modified to match the split.