Traditional retail investments have tapered off over the years due primarily to innovations in the financial sector and investor behavior changes. Some investors still have portfolio management strategies in the retail sector, but those are few and far between. An innovation has earned some popularity recently as a great supplement to traditional retail investing strategies. Structured products provide these investors with access to derivatives they wouldn’t normally be able to access to diversify their portfolios. We’ve taken a deeper look at structured product investments, how they work, and what risks are associated with them.
What Are Structured Product Investments?
A structured product investment can be defined as a pre-packaged investment that is usually tied to an index and can be customized based on the investor’s risk tolerance. The package typically includes assets, interest, and at least one derivative. When it comes to the payouts of a structured product investment, it follows a similar model seen in options. Structured products are fairly accessible to an investor interested in retail investing, similar to mutual funds, bonds, stocks, and ETFs.
How Structured Products Work
Financial institutions offer notes for structured products with a specific face value. These notes are fully protected, and there is no risk of losing any money from your initial investment in many situations. An investor can also choose to forfeit some of the protection in favor of riskier features that may produce more favorable returns. Since most investors choose structured products to diversify their portfolio management, the strategies used depend largely on how their portfolio looks and what they want to accomplish. Most structured product packages have a three-year maturity date, so significant gains aren’t to be expected with such short-term investments.
Common Risks With Structured Products
Since an investor can customize structured product investments to fit their portfolio, a trade-off is lack of liquidity. Investors usually don’t see their returns on a structured product investment until the maturity date, so it’s an investment option you have to be committed to before putting your money in. Transparency in pricing is another risk that sometimes deters investors from structured products. There are no standards for pricing, and the issuers can work in expenses creatively to their advantage. The good news is reputable financial institutions typically offer structured products, so you can have some peace of mind working with a stable institution, even if the FDIC does not back the funds.
At Stock Investing Info, we are knowledgeable about many different investment options to help any type of investor reach financial success. Structured products offer unique opportunities for investors who like the idea of being able to access derivatives. While this investment strategy is used mainly for diversification purposes, investors can invest in as many structured products as they feel comfortable with. Understanding the complex nature of structured products can help you decide whether they are right for you, so contact us at any time to learn more about them.