Tags: WSJ | Zweig | Structured | Notes

WSJ's Zweig: Do Your Homework Before Buying Structured Notes

By    |   Sunday, 19 October 2014 10:07 PM

Structured notes have come into vogue, as they always do when there's turmoil in the stock market, explains Wall Street Journal columnist Jason Zweig.

The CBOE Volatility Index (VIX) has soared 82 percent in the past month.

But be careful before investing in structured notes, as they can carry great risk, he writes.

A structured note is unsecured debt issued by a bank or brokerage firm. The performance of other assets, generally stocks or market indexes, dictates the amount of your return.

The idea is to limit or erase your exposure to losses while offering you a piece of potential gains. That would obviously be helpful in environments like the current one.

"But whether you should buy them depends on the exact terms of each note—and on whether you can trust your adviser when he says he understands them," Zweig says.

"They are sometimes marketed by less-scrupulous financial advisers as a kind of high-yield, low-risk, backdoor way to own stocks, even though regulators have warned that investors can get burned."

William Droms, co-chairman of Droms Strauss Advisors, an investment advisory firm, offers a mixed picture of structured notes.

"If used appropriately, [they] can provide an investor with a pre-determined amount of upside potential and decreased risk," he writes on MarketWatch.

"But structured notes are certainly not risk free. The first and most important risk to assess is the credit risk of the issuer. Since structured notes are bonds backed by the issuing bank, if the issuer defaults, bondholders become unsecured creditors of the bank."

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Structured notes have come into vogue, as they always do when there's turmoil in the stock market, explains Wall Street Journal columnist Jason Zweig.
WSJ, Zweig, Structured, Notes
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2014-07-19
Sunday, 19 October 2014 10:07 PM
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