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Published on November 21st, 2015 | by admin

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Understanding The Basics Of Structured Notes

Structured notes are a combination of different kinds of investments that in theory will provide you with returns and security.  The idea is that the structured notes combine a protective feature that protects the principal invested and gives access to other investments that can help yield bigger returns than a normal note.  If you are interested in this form of investment, it is wise to understand the basics a bit better and take into consideration the risks involved.  To help we will discuss both below.

The Basics

They are often referred to as structured notes with protection for principals.  When you buy structured notes, you are actually buying into a special form of debt obligation or bond.  With the note, you are guaranteed to get back at least some of the principal back, if not all with extra returns on top.  The return on a structured note is calculated from the performance of the index which the note is tied to.  A simple kind of structured note may only involve investing a small amount of your money into a derivative; while a more complex note may involve the use of hedging strategies that both limit the downside and upside just in case the derivative performs badly.

The Benefits

With structured notes you can benefit from investments that aren’t open to sole investors, which means you have the chance to make better returns.  Additionally, they provide your principal with some protection, while trying riskier investments for higher returns.

The Drawbacks

As they can be illiquid, structured notes cannot be sold easily, and if you are able to sell them you have to sell them for a price set by the bank who sold them to you in the first place.  If the structured notes you invest in use hedging strategies this can mean there is very complex payout arrangements that mean if indexes tied to the bond behave unexpectedly, you could make less in returns or a larger loss than you were expecting.  This is why the term principal protection is used with no guarantee.

Make Your Own

Because structured notes are essentially a combination of 2 investments, you can do something similar by way of diversification.  For example, rather than investing in $10000 of treasury bills, you could invest $2000 somewhere else and the remaining £8000 in treasury bills.  Then if your investment fails you will still have 80% left of your principal, as well as whatever you earn in returns from your treasury bills.  However, if your investment performs really well and for example, triples in price, you will get 20% of whatever money has tripled, while also getting a return on your t-bill investment.  Although not strictly referred to as a structured note, this type of investment follows the same basic principle and as a result of the simpliciity it is far more liquid theoretically and you will have a lot more control over it.

Obviously, if you are really interested in investing in structured notes, it would be wise to further research your options by speaking to an expert who will be able to give you the necessary guidance.


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