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Freetrade
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== Risks == As with any investment, investing in Freetrade carries a level of risk. Overall, based on the Freetrade's adjusted beta (i.e. 1.85)<ref>Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1. For example, Supply@ME Capital's adjusted beta (5 years, monthly data) is 4.61, and is, accordingly, 561% above the market beta (of 1); assuming that a 'high' level of riskiness is 50% or more above the market beta, then the riskiness of investing in Supply@ME Captial is considered to be 'high' (561%>50%). For estimating an asset's beta, in terms of time period, and frequency of observations, the most common choice is five years of monthly data, yielding 60 observations. One study of U.S. stocks found support for five years of monthly data over alternatives. An argument can be made that the 2 years, weekly data can be especially appropriate in fast growing markets. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.</ref>, the degree of risk associated with an investment in Freetrade is 'high'. Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used the seven available share price Freetrade data points. We note that the amount of available data observations for Freetrade is less than what's typically used in the five years of monthly data beta calculation (i.e. seven observations vs. 60 observations), and accordingly, calculating the beta of such a company has been considered by many to be abnormal; however, for the benefit of simplifying investment comparisons and decision making, we believe that a single standardised risk measure is useful, and that the most appropriate measure is beta. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'high' risk, it must have a beta value of 1.5 or more. Further information about the beta ratings can be found in the appendix section of this report. === Early-stage investment === Freetrade is at one of the earliest stages of the business lifecycle, and the failure rate of companies at that stage is usually much higher than those at a later stage. As of 2022, 57% of companies that are incorporated in the United Kingdom fail within the first five years of the companies incorporation, according to the Office for National Statistics.<ref>https://www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/bulletins/businessdemography/2020#the-south-west-continued-to-have-the-highest-five-year-survival-rate</ref> We note that Freetrade is more than seven years old. === Illiquid investment === The number of transactions in shares of private companies is usually significantly lower than in public companies, typically resulting in it taking longer to sell shares in private companies at a price that is at least equal to the price that the shares were bought at. Accordingly, the Freetrade investment opportunity is considered to be higher risk than more liquid companies (such as Hargreaves Lansdown). === Regulatory === Freetrade operates in an industry with extensive and comprehensive regulation. The risk that the company fails to comply with the existing standards of the regulatory system has the potential impact for financial penalties, regulatory censure and negative publicity. There is also a risk that the regulatory environment evolves in a manner that has a negative impact on its business and operations, whether through reduced revenue, higher costs or increases in capital and liquidity requirements. === Business === Freetrade operates in a competitive environment and runs the risk that revenue and customer growth do not meet expectations or slow down. Freetrade’s customer activity is sensitive to market conditions and volatility. === Operational === High volume or levels of activity through the trading platform can place stress on Freetrade’s systems, people and processes, which could result in service outages or in Freetrade being unable to deliver the level of service that its customers expect. Poor customer service and outcomes could result in a loss of customers and reputational damage. === Conduct === Freetrade runs the risk that its culture, values and actions fail to adequately support customer focused conduct and thereby lead to potentially poor customer outcomes or not treating customers fairly. Equally, Freetrade interacts with financial markets and poorly controlled activities could threaten the sound, stable, resilient and transparent operation of the financial markets. These risks could result in regulatory censure, as well as a reputational impact, a loss of customers and increased difficulty in attracting new customers. === Information security === Freetrade or its trusted third party service providers could suffer a data breach as a result of a cyber attack, just as any other financial services company. Such a breach could result in financial penalties or censure from both data protection and financial regulators. As well as reputational damage impacting Freetrade's ability to attract and retain customers. === Third party === Freetrade contracts with third-party providers to provide services to customers and to support back-end processes. The risk of a loss of service from a third-party provider which could result in a delay or inability to process customer transactions or perform regulatory reconciliations and could result in customer dissatisfaction and financial loss to Freetrade through a reduction in transactions through the trading platform or regulatory penalties.
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