The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.
This article is the second in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
Shares
Structured Products
Cash
Current Accounts
Savings Accounts
Annuities
Certificate of deposit
Options
Treasury Bills
Bonds
Tracker funds
Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.
Structured Products
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A structured product is an investment that has a defined return linked to a defined underlying index such as the FTSE100 and is delivered at a defined date. They were developed as an alternative to defined equity, bonds, and deposits investments. Structured products will tend to form a combination of all three products. They befit from the exposure to the potentially high returns from the financial markets (e.g. Stockmarket) but with some downside protection in the event of a downturn.
You can buy structured products/ deposits through many Highstreet Banks, Building Societies, and Independent Financial Advisers (IFAs).
How does it work?
The easy answer to this is that it depends on the structured product. Each product is different. Some examples, to give you an idea of how they work:
Capital at Risk: A 5 year investment with Stockmarket exposure and some risk. At the end of 5 years if the FTSE is higher then the product will give you a 60% return, if lower you will get your capital back unless the FTSE falls below 50% in which case your capital will track those loses.
Deposit Based Contract: 200% of the rise in the FTSE 100 index over 5 years subject to a maximum return of 40%. Capital back if the FTSE falls in that time period. This would be covered for up to £80,000 by the financial services compensation scheme.
Kickout Contract: The contract could have a six year term and if the FTSE is at 6,000 points today (I wish!) then if the FTSE us up one basis point in a year from when the contract began then the contract ends and the investor is paid a set percentage e.g. 10% (the percentage is based on current market conditions). If the FTSE isn't higher, the contract runs for another year. If on the start date, 2 years later, the FTSE is higher (even by one point) then the investor gains 20%. If it misses again, the contract runs for its third year, with a 30% gain and so on and so forth until 6 years is up. If the FTSE is higher after 6 years you will gain a 60% return. If the FTSE is lower by less than 60% you receive your capital back, but if more than 50%, you track the FTSE's loses. This type of investment is not covered by the financial services compensation scheme.
Advantages
Better return than cash, without the levels of risk of shares or bonds
Many products cover the investor's capital for a fall of up to 50% in the underlying tracked product
Takes away some uncertainty of returns from the stockmarket
If the market falls 49% you can still get your capital back
Disadvantages
If the bank behind the product goes bust, you've lost your money since the product is not covered by the financial services compensation scheme
May miss the bigger gains from tracking the stockmarket point for point
Overall conclusion
Score: 8
I really like these sorts of investments and have a kickout scheme myself (see my current financial breakdown). However, I would offer a little advice:
Advice: Make sure that you know exactly how your structured product works. When buying a structured product be prepared to hold for the full investment term. You can get access to the funds before the term is finished but usually at a cost. Utilize your ISAs to make sure that the returns are tax free. Structured products should never be your only investment. It should be part of a portfolio.
Readers, what's your opinion on shares?
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multimillionaireroad
com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.
