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Investment ABC

Investment services
Securities market
How to start investing?
Taxation of income earned on investments
What is an investment account?
What is a securities account?
Taxation of investment deposit interest
What is an investment fund?
Why invest in funds?
What does SEB’s fund selection include?
What is fund saving?
Taxation of income earned from investment funds)
What is an equity?
What is an ETF?
Other securities and assets suitable for investing
Key terminology

 

Investment services

Among other things, investment services include

  • provision of investment advice;
  • reception and transmission of orders related to securities;
  • execution of  an order related to securities;
  • securities portfolio management (service offered only to a private banking client).

The provision of investment services is a highly regulated area of activity in the European Union, the United States of America and in the rest of the world, therefore we recommend you to pay extra careful attention to information on disclaimers at: www.seb.ee/eng/legal/legal-information. In Estonia it is regulated by the Securities Market Act, which is based on, among others things, the European Union Markets in Financial Instruments Directive (MiFID). The main objective of this regulation is to increase the protection of investors and the transparency of securities markets.

The pre-requisite for providing investment services is, first of all, classifying clients in the manner prescribed by law. The clients are divided into retail clients, professional clients, and eligible counterparty. By default, each client is categorised as a retail client, as retail clients are offered the most comprehensive information on securities as well as highest level of investor protection.

The bank shall always give you information on services offered and on securities before providing investment services. General information on securities, investment services, and accompanying risks are available from SEB’s website at www.seb.ee/eng/investor-protection.

Upon recommending investment products or services (giving a personal recommendation), as a result of investment advice, or when managing the securities portfolio, the bank is obligated to rely on your

  • knowledge and experience for making investment decisions,
  • financial situation, and
  • investment objectives and risk tolerance.

In case you invest on your own initiative, the bank is obligated to evaluate appropriateness only regarding your knowledge and experience before accepting a transaction order. Appropriateness is evaluated before the following transactions:

  • purchasing securities at the market price or desired price;
  • subscribing securities;
  • purchase or conversion of fund units;
  • concluding a fund saving contract.
 

Securities market

Securities (equities, bonds, exchange-traded funds or ETF-s, etc.) can be purchased or sold on the securities market. Generally, securities are traded either on a regulated market (including stock exchange) or in a multilateral trading facility. Today, most trading places use an electronic trading system.
The more important securities market participants are

  • investors – persons who invest for the purpose of earning financial return (e.g. persons who wish to purchase or sell equities);
  • financial intermediaries – financial institutions who bring together persons who wish to purchase and sell securities on the securities market;
  • issuers – persons who issue securities for the purpose of financing their activities (e.g. a company, whose issued equities or bonds are traded on the securities market);
  • infrastructure service providers:
    • stock exchanges and multilateral trading facilities (for instance, NASDAQ OMX Tallinn in Estonia) who provide the necessary infrastructure for trading securities and bring together investors who wish to purchase and sell securities;
    • central securities depositories (CSD) who provide depositary, settlement and other related services (e.g. Estonian Central Register of Securities in Estonia);
    • central banks who perform cash settlement related to securities transactions;
    • financial supervisory authorities (FSA) who perform financial supervision (e.g. Financial Supervision Authority in Estonia).

It is important to know that, in addition to the regulated equities market and multilateral trading facilities, securities can also be purchased and sold over the counter (OTC market), free of payment (FOP) when agreed upon with the counterparty, or, as a delivery versus payment (DVP) transaction.


How to start investing?

Step 1

Consider your objectives and opportunities.

  • What kind of amounts are you willing to invest?
  • For how long time do you plan to invest?
  • How much profit do you wish to earn?
  • How much risk can you tolerate in terms of fluctuations in your investment’s value?
  • What kind of taxation system would you like to use? Are you planning to invest long-term into different types of investment products or only once into a specific type of investment product?

    If you want to start using the income earned from the investment at once, it is not reasonable to use an investment account. If, however, you plan to reinvest the earned income into financial assets, it is reasonable to consider using an investment account (see also “What is an investment account?”).

Step 2

Visit the nearest SEB branch for an investment advice or go through the process in the Internet bank . The advantage of an investment advice in an SEB branch is that the advisory process will be covered together with a private advisor, who will help you to find a suitable investment product. The selection of investment products offered by SEB includes investment deposits and funds as well as pension products and unit-linked life insurance.

If you have sufficient investment knowledge and experience and you are ready to take risks, you can also invest at one's own risk in shares and ETF-s (exchange-traded funds). In addition to knowledge and experience this also requires somewhat more capital because higher costs accompany with share and ETF transactions and safekeeping when compared to investing in funds.

Step 3

The most convenient way to invest in all investment products on offer is via the Internet bank. You can also conclude contracts and make transactions in an SEB branch.

If you are planning to start investing in investment funds regularly, you can also conveniently conclude a standing payment order for a fund saving contract in the Internet bank.

 

Taxation of investment return

Income from investments may be taxed. The taxation depends, for instance, on the investor’s tax residency and legal form, but also the income type and several other circumstances. In addition, for certain types of securities, legislation enables some investors to enjoy several significant tax incentives or establishes taxation conditions different from the usual ones. For more specific instructions, consult the tax office of your country of residence or contact a tax advisor.
You can also find information on taxation of investments from the following source.

 

What is an investment account?

An investment account allows you to postpone the taxation of return on investments. Taxation cannot be postponed for all investments, but only for the so-called financial assets or tradable shares, ETF-s, fund units, bonds, and investment deposits. When using an investment account, the purchasing, selling, and conversion of securities must be done from a separate account (investment account), opened only for investing, and the details of the investment account must be declared in the tax return.

Read more
Also view the investment account instruction manual compiled by the Ministry of Finance

 

What is a securities account?

Securities account

The prerequisite for acquiring and performing transactions with investment fund shares, as well as equities and ETF-s, is a securities account. At SEB, you can open both an ECSD (Estonian Central Register of Securities) and a SEB intra-bank securities account. You can open the account either via the Internet bank or an SEB branch.

An ECSD securities account holds securities, the register of which is kept by the Estonian Central Register of Securities. For instance, you need this type of securities account when performing transactions with the shares of Estonian, Latvian, and Lithuanian companies and in order to acquire voluntary pension fund units.

An intra-bank securities account holds securities, the register of which is kept by other registrars. In these registers, the bank has opened a nominee account in order to store the securities of all of its clients and shall keep intra-bank records about each client’s position. This type of securities account is required in order to perform transactions with foreign equities (except for Latvian and Lithuanian shares), ETF-s, and in order to acquire the fund units or shares of AS SEB Varahaldus and SEB Investment Management AB (except for pension funds).

 

Taxation of investment deposit interest

Investment deposit interest is taxable income. Via an investment account you can defer income tax liability and, if necessary, deduct costs (e.g. exit fee) from the income. If you do not use an investment account, the bank shall deduct income tax from the payable amount upon the end of the deposit term and shall forward it to the Estonian Tax and Customs Board.

 

What is an investment fund?

In general, an investment fund is a pooled portfolio of investments formed with money collected from investors, whose objective of management is to earn investors income from the investing of the fund's assets into different securities, deposits, or other financial instruments.

The legal form of investment funds may differ by countries, in the European Union, mainly contractual investment funds and corporate funds are acknowledged, but also funds operating as investment trusts (the latter mainly in the United Kingdom and Ireland).

The amount of your share in the fund is shown by the fund units or shares issued to you.

Money collected for you and other investors from the sale of fund units is used to form a set of assets that is diversified between various financial instruments. A diversified investment portfolio hedges risks related to single instruments. Depending on the fund’s investment policy, you may access several world financial markets via acquiring fund units with one purchase and invest in several different securities at once, in which investing one by one would be expensive and often also too complicated.

A fund may earn income in several ways: from investment value growth, but also from income earned on payments issued on fund investments (dividends and interests). Income earned from fund's assets is generally reinvested.

The growth of or decrease in the value of the fund's assets, which is achieved by investment activities, is reflected in the growth or decline of the net asset value of unit. You can realise your gains or losses from your investment by selling units. If the unit’s redemption price exceeds its original cost (with service charges), you have earned income from the fund; otherwise you have incurred a loss. In some cases, the income earned by the fund is also allocated to you, as the investor, as payments from the fund. Payments are generally made in cash, in some cases payments can be made as additional units.

One of the peculiarities of investment funds is that fund transactions are performed using the so-called blind bidding system, in which the transactions are not performed with the fund unit prices of the previous banking day and published on the transaction date, but with the prices of the transaction date. As the transaction date price is calculated on the next banking day based on the closing prices of securities belonging to the fund's assets, the system is called blind bidding – at the moment of forwarding a transaction order, the transaction price of a fund unit is not yet known.

Secondly, when performing transactions with fund units, the fact that the day of submission of the transaction order is generally considered as the banking day on which the transaction order was submitted to the management company or distributor of fund units. If the transaction order was submitted to the management company or the distributor of fund units after the so-called cut-off time, or on a day that is not a banking day, the first following banking day after the submission is considered as the transaction reception date.

Read more

For whom is an investment fund suitable?

Investment funds may be suitable for both beginners and experienced investors.

Managing a few securities generally requires profound investment knowledge, long-term experience and great dedication; although many investment enthusiasts lack the time, knowledge, and experience. Therefore, it is worthwhile to trust your money with professional investment specialists who help to achieve a more efficient hedging of risk, in order to reduce the influence of a single investment failing. Investment fund assets are invested by experienced professionals: fund managers and their support team of analysts.

It is essential to know that the return on fund investments is not guaranteed. Moreover, the value retention of the investment is not guaranteed either. Investing is always accompanied by the risk of losing money; a risk that is rewarded with a possibly higher rate of return or income. As a rule, the more risks, the higher may be the expected return on the investment.

An investor experiences the risk as a unit price fluctuation. In order to get a better overview of the reasons for fluctuation, the public offer prospectus of the investment fund units, key information or simplified prospectus, terms, annual declarations and semi-annual reports and other data and documents published about the fund should be reviewed carefully at www.seb.ee/eng/savings-and-investments/investments/investment-funds.

 

Why invest in funds?

Both small (preferably from EUR 10) and large amounts can be invested

You do not necessarily need to have large amounts of money in order to purchase fund units, and you can invest either once or on a regular basis. You can conclude a standing payment order for fund saving designed for regular money placement, in case your one time investment amount is at least EUR 10. One time investments generally do not have minimum amounts.

Risks are better diversified

Upon investing, it is essential to diversify risks or invest assets in several investment objects. Such a distribution allows one to reduce the effect of a single investment failing. By investing through a fund, you acquire a part of the widely diversified investment fund portfolio.

Investment fund assets are invested by professionals

Investment fund assets are managed by dedicated specialists who have long-term experience in selecting appropriate securities for investing and with complicated analysis. Managing your money and finding the most appropriate investment opportunities is their daily job.

It is easy to follow your investment’s value

An overview of instruments belonging to the fund's assets can be viewed on SEB’s website for each month or end of quarter at www.seb.ee/fondikursid. In addition, fresh information on the fund portfolio’s rate of return can be viewed daily in the Internet bank. We also publish price information and rates of return on SEB’s website www.seb.ee/fondikursid.

You can resell the investment fund units at any time

Should you need the money you invested in the fund, you can access it quickly. Generally, the money is received in the current account on the third banking day after entering the sales order.
Nevertheless, the particular fund’s terms and conditions and prospectus should be carefully examined before making an investment decision. In the case of SEB Investment Management AB funds, also examine the document “Special Terms and Conditions of Offering Units in Estonia” in order to be up to date with the specifics of issuing and redeeming fund units and the possible reasons for postponing or stopping unit redemption.

Fees associated with fund investments

When investing into funds, you have to bear in mind that upon purchasing, selling, and conversion of units a commission fee applies, consisting of a transaction fee and, for most funds, the fund’s subscription and redemption fee. Transaction fees do not apply to regular investments into standing payment orders for fund saving. Fees apply to keeping some fund units (including third pillar pension funds) in the same manner as for shares and bonds. Safekeeping of all funds managed by SEB Investment Management AB is free at SEB.

You can get a better overview of transaction and safekeeping fees from the price list. The subscription and refemption fees for the funds are published on SEB’s website.

 

What does SEB’s fund selection include?

An SEB client can invest in several dozen funds managed by SEB, including second and third pillar pension funds. Via the offered funds, you can invest in all of the world’s most important securities markets. Besides regular equity and bond funds, our selection offers funds that invest in currencies, commodities, private equities, and other asset classes.

Most funds managed by SEB Investment Management AB are interchangeable without a subscription and exit fee, whereby in case of fund conversion transactions, taxation of the possible income is deferred until selling the converted units in the future.

In order to get a quick overview of any fund on offer, see the summarised information on the respective fund on SEB’s website. It is very important to understand which assets are invested in, how it is done, and how big the unit price fluctuation can be. Besides the overview of all the funds on the website, it is worthwhile to view the key investor information document presented to the investors and the monthly reports compiled by fund managers. Before making the final investment decision, please carefully observe the fund’s terms and conditions, public offer prospectus, key investor information document or simplified prospectus, financial statements, and other important information, all available on the SEB website at www.seb.ee/eng/investments-and-deposits/investment-funds.

View fund selection

 

What is fund saving?

Regular saving, or fund saving, means investing in the fund with a fixed frequency and in certain amounts. The smallest regularly invested amount is EUR 10, whereby you can choose a weekly, monthly, quarterly as well as annual investment frequency. It is a standing payment order for the purchasing of fund units.

Regular investments help to hedge the risk to invest at the so-called wrong moment or immediately before the decline begins. By allocating money regularly, you invest small amounts when the securities markets rise and fall. Even when you start regular or diversified saving immediately before the decline of securities markets, you will likely see a positive return faster than in the case of a one-time investment once the decline is replaced with a surge.

It is very important to understand that during the validity of the standing payment order, you must regularly follow the developments of the investment fund and its compatibility with your investment goals and risk tolerance, including information on the fund, and shall consider amending or terminating the standing payment order, if necessary.

Saving money in funds via fund saving is considerably more favourable than usual: there is no commission fee for the transactions.

 

What is a share?

A share is a security that gives the opportunity to invest in a company by acquiring a share of it, in return receiving a share of the company’s growth in value and distributed dividends. Historically, stock markets have offered the highest rate of return. At the same time, compared to investment funds, for instance, equity investments are generally accompanied by a higher risk of losing money.

Via SEB you can acquire exchange-traded shares from more than 20 equities markets. You can submit transaction orders for share transactions in the Internet Bank, branch, or with a broker service (for the latter, a financial markets client agreement is required). Additionally, you can also conduct securities transactions with an agreement with the transaction’s counterparty.

Read more

For whom is investing in shares suitable?

SEB does not advise or give personal recommendations on making share transactions; you conclude such transactions on your own initiative and responsibility. In order to invest in equities, you should have adequate investment knowledge and experience, but also sufficient funds, as successfully investing in shares requires a profound analysis and is generally more expensive than investment funds. You can get a better overview of fees from the price list.

 

What is an ETF?

An exchange-traded fund (ETF) is similar to an investment fund because it is a set of securities or other underlying assets. However, unlike a regular investment fund, ETF-s are traded on the stock exchange similarly to equities. ETF-s are a cost-effective way to invest in the shares of a specific region, sector, or instead in some commodity (e.g. gold, oil). Unlike regular funds, ETF-s have no entry or exit fees. Share transaction commission fees apply when trading. It is possible to trade with ETF-s only when the relevant stock exchange is open for trading.

Read more

For whom is investing in ETF-s suitable?

As with equities, you should have sufficient investment knowledge and experience when investing in ETF-s in order to comprehend the essence of the relevant ETF (including risks). You can get a better overview of fees from the price list.

 

Other securities and assets suitable for investing

Besides regular investment funds, shares, and ETF-s, there are plenty of asset classes suitable for investments. The most common are bonds, derivative instruments, commodities, currencies, private equity funds, and hedge funds.

By its very nature, a bond is a loan in the form of a security. Today, a number of very different bonds are on offer. The most popular bonds are those with a fixed interest rate, floating interest rate (FRN), and zero coupon bonds (people who acquire the latter, do not receive regular interest disbursements).

By risk level, bonds are divided into investment grade and so-called high-yield bonds or bonds without an investment grade rating (e.g. Standard & Poor’s rating below BBB-). Lately, structured bonds are spreading and these are similar to an investment deposit: their interest amount is associated with the price fluctuations of some other financial assets.

A derivative instrument is a security or contract, the value of which is derived from the price fluctuation of some other security, asset, stock index, interest rate, or commodity established as an underlying asset.

Commodities are, for instance, metals and oil, but also cereal, sugar, cocoa, etc. Both physical commodities and commodities as derivative instruments (e.g. forwards, futures, and options) associated with underlying assets can be traded.

Currencies are traded on foreign exchange markets (forex, FX). Currencies are also traded both directly and via derivative instruments (forwards, swap contracts, etc.).

Private equity asset class includes those enterprises, the shares of which are not in public offering.

Generally, investing directly in those assets is too expensive and often also too risky for a retail client, but SEB offers the chance to invest in all the above-mentioned asset classes via investment funds, which is a cost-effective and reasonable way to create a broad investment with diversified risks.

 

Key terminology

Fundamental analysis. A method of assessing securities, in which the evaluation of the macroeconomic aspects that influence the security (overall economic situation and the situation in the company’s economic sector) and the company’s specific indicators (the company’s financial situation, the management of the company, etc.) are used and in which the security’s fair value is aimed at as compared to the market price at the moment of analysis.

Technical analysis. A method of assessing securities, in which the trading statistics of a security are followed, including historical prices and turnover. Users of the technical analysis are not trying to find the fair value of a security, but are instead using graphs and other means to detect trading patterns which can help to predict a security’s future price movement.

Absolute and relative rate of return. While the absolute rate of return shows the equity’s, fund’s, or some other security’s rate of return in a certain period, the relative rate of return compares this absolute rate of return with the benchmark (the absolute rate of return for funds is compared with the benchmark index, other securities are generally compared with the securities of the relevant country, branch of industry, or the company’s direct competitors).

Benchmark index. Standard or the basis of comparison used to measure the rate of return and riskiness of an equity, fund, or other security or even a securities portfolio.

Tracking error. Annual deviation of the differences between the rate of return of the fund and the benchmark index. In case of funds, the tracking error is calculated based on the monthly rate of return difference of the last 24 or 36 months. Annualising the standard deviation of these values results in the tracking error value. The smaller the tracking error, the more closely the fund’s rate of return resembles the benchmark index’s rate of return.

Overweight. Situation, in which a security’s, sector’s, or area’s proportion in a fund or securities portfolio is bigger than in the benchmark index or the compared indicator: for example, if the proportion of company A is 6% of the stock market index, but in the fund the proportion of company A’s equities is 8%. The term underweight denotes an opposite situation.

Outperform. Indicates that an equity, fund, or other security has managed to beat its benchmark index’s rate of return.

Underperform. Indicates that the security has remained below the benchmark index’s rate of return.

Top-down. A strategy for selecting securities, in which first the portfolio is distributed among asset classes, then between areas and sectors.

Bottom-up. Immediately focuses on the analysis of the securities of interest.

Return on investment or rate of return in a certain time period. Indicates how much relatively greater is the investment’s final value compared to the initial value.

Standard deviation. Statistical value indicating how much the values differ from the average value. Standard deviation is a mathematical expression of volatility. For example, if two funds have earned on average 10% of dividends annually and the standard deviation of fund A is lower than that of fund B, this means that the fund has been more stable and the other fund’s value has fluctuated more.

Sharpe ratio. Compares the investment’s rate of return and risk. The higher the Sharpe ratio, the better the investment’s rate of return, considering the investment’s risk level (per one risk unit).

Alpha. Ratio that helps to assess the productivity of active portfolio management. Positive alpha indicates a rate of return higher than the benchmark index achieved with successful investment activities.

Beta. Ratio that measures the investment’s rate of return as compared with the market. Beta also indicates the relative volatility of the financial instrument’s price. The higher this indicator, the more volatile the particular financial instrument as compared to the index or market.

Subscription fee. The price of investment fund units for the investor is increased to the amount of the subscription fee (for the client, entry fee). For example, if the net asset value of unit (NAV) is EUR 10 and the issue fee is 1%, the investor shall pay EUR 10.1 for the unit.

Redemption fee. The price of investment fund units for the investor is reduced by the redemption fee (for the client, exit fee). For example, if the net asset value of unit is EUR 10 and the redemption fee is 1%, the investor shall gain EUR 9.9 when he sells this unit.

Management fee. Calculated as a percentage of the volume of investment fund assets. The management fee is paid from the fund to the management company. The fee is deducted from the fund's assets on an ongoing basis. The rate of return calculated based on the fund’s net value is already the net rate of return: the management fee shall not reduce it.

Performance fee (sometimes also success fee). An additional part of the investment fund’s profit paid to the management company for good results.

Total expense ratio or TER. Expresses the total costs of the investment fund. Both the fund’s management and operating fees are considered. TER includes mainly costs related to managing the fund, for instance, transaction fees and administration fees (management fee and depositary's fee). TER does not include subscription nor redemption fees. TER is expressed as a percentage and it is acquired by dividing total costs with total assets.

 

 

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