The Securities & Futures Commission advises investors to ensure they understand the complexity and risks involved before conducting leveraged foreign exchange trading. Investors should also check if the trader is licensed properly before opening an account.

The commission says some licensed companies or their employees have been found using an offshore vehicle to enable clients to carry on trading outside of Hong Kong. These offshore vehicles are not licensed to conduct leveraged foreign exchange trading by the commission and in most cases, they are not licensed by the regulatory authorities where they are domiciled.

In its online column Dr Wise, the commission said factors affecting currency movements are complex, and foreign exchange trading is not simple. The politico-economic factors are difficult to predict and can change swiftly. Even if someone correctly predicts the right direction of a currency's movement, they would also need to determine the right timing to move in and out of their positions.

Leveraged foreign exchange trading is even more complex and risky than basic currency trading. To open a leveraged foreign exchange trading account, all someone needs to do is make a deposit with the trader and they can take contract positions representing many multiples of the initial deposit.

In principle, leverage will allow small changes in an exchange rate to contribute significant profits on someone's capital outlay, which explains why investors are tempted to gear up their positions. While gearing can magnify profits, it can also lead to significant losses, it said.

Margin calls are issued to investors whose balance in the account is lower than the required maintenance level. If they fail to meet margin calls, their positions can be liquidated according to the client agreement and they can lose more than the initial trading capital.

Investors will remain liable to pay the trader any resulting deficit in their accounts. They may also have to pay finance charges.

They are also advised to familiarise themselves with all the terms of the client agreement before dabbling in the exchange.