These products are sometimes referred to as structured products or non-conventional investments. They tend to be both more complex—and more risky—than traditional investments, and often tempt investors with special features and higher returns than offered by basic investments.
Some examples of complex products include notes with principal protection and high-yield bonds that have lower credit ratings and higher risk of default, but offer more attractive rates of return. Complex products may use futures and options, as well as complicated trading strategies, to achieve investment objectives.
Although these products may have attractive qualities, it is crucial to understand each investment’s distinct features, risks and rewards.
Structured products are essentially index trackers with some extra features. While there is some variation, here is how a typical structured product works:
You decide how much money(capital)to invest and plan to leave it there for the term of the product;
Structured products are a medium term investment; we usually create products with a term between three and six years;
Your return is normally linked to the performance of an underlying asset, for example a stock market index such as the DAX or S&P 500 or FTSE 100. The criteria to determine if a return is payable depends on the product, such as, if the index is at or above a certain level at the end of the term, the return is paid.
Whether you benefit from the full amount of any growth or just a percentage depends on how the structured product is designed;
If, at the end of the term, the criteria for payment of the return are not met, you may not get your original investment back;
‘Structured capital-at-risk products’ or ‘SCARPs’ aim to repay the original investment at the end of the term, provided the underlying market has not fallen below a predetermined threshold. If this does happen, then you will lose money;
Some products aim to repay the original investment in full at the end of the term, regardless of how the underlying market performs. This does depend on the ability of the issuer to meet its obligations. You are exposed to the credit risk of the issuer. So, if the issuer becomes insolvent, you could lose some or all of your investment.
Understanding the Risks
Structured products are complex, if you are unsure if they are suitable for you, you should speak to an Independent Financial Adviser before buying.