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Build a Structured Product
A structured product is an investment that combines desirable traits of different asset classes, such as bonds and stocks, into a single investment instrument. For example, some structured products provide complete principal protection, as a treasury note would, while simultaneously offering some degree of stock market participation. The result is an investment that cannot lose but can win. An individual investor can build his or her own structured product with a little know-how.
To begin, a zero coupon bond, such as a treasury bill, could be purchased. T-bills are bought at a discount to their value at maturity. For example, an investor might buy $9,600 in t-bills knowing that, based on the t-bill yield, they'd be worth $10,000 at maturity.
Now, if an investor had $10,000 in cash to begin with (i.e., before any investments were made) he could invest $9,600 in t-bills knowing that he would have his $10,000 back at maturity. The next question is, "How does the $400 get invested?". One answer might be to buy $400 worth of equity call option(s), perhaps on a broad market index ETF, such as SPY or DIA.
What's the result? Well, the investor knows he'll get his principal back because he knows what the t-bills will be worth at maturity; the value will be $10,000. Depending on the what the market does, his call option(s) could be worth from zero to a lot more than zero. The bottom line is that he'll either have his $10,000 in principal back, or he'll have more. What you don't know in advance is how much more.
Structured products, whether you build your own or buy them "pre-assembled" from your broker, are excellent alternatives for risk-averse people who want a shot at returns in excess of those offered by safe bonds.
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This is not a solicitation or recommendation to buy any securities, options or financial instruments of any type. Any information in this email is for educational purposes only.
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