How to Lose Billions on This Fad Investment: Apple Inc. (AAPL), Goldman Sachs Group, Inc. (GS), Citigroup Inc. (C)

Page 1 of 2

During the financial crisis, Wall Street firms got a reputation for making money at their clients’ expense. Yet years after the end of the crisis, Wall Street’s finest are still providing their clients with access to complicated financial products, and one recent episode shows how those products can go awry for unsuspecting investors.

Late last month, Goldman Sachs Group, Inc. (NYSE:GS) reported in a filing with the SEC that it had sold nearly $30 million in complex debt instruments called structured notes that were tied to the performance of Apple Inc. (NASDAQ:AAPL). That sale happened to come immediately before Apple released its most recent earnings report, after which the stock plunged. Although Goldman vehemently denies that it made money at the buyer’s expense, various firms have sold billions of dollars in structured notes tied to Apple Inc. (NASDAQ:AAPL) and other investments in the past year, and given the tech giant’s losses, many of those notes have worked out badly for their buyers.

Apple Inc. (NASDAQ:AAPL)How structured notes work
Structured notes were designed to cater to the need among investors for substantial and dependable income. In general, they involve short-term bets on market benchmarks or individual stocks, offering yields well in excess of what the targeted investment offers in dividends. For instance, as Bloomberg reported, some of the notes that Goldman sold on Apple Inc. (NASDAQ:AAPL) earlier in January were designed to pay a yield of more than 9% per year for as long as three years, with protection for investors’ principal as long as the stock avoided losses of more than 30%.

But there’s no such thing as a free lunch on Wall Street, and the lucrative income from structured notes comes with a catch. If the stock does fall below a certain threshold, then the company that sold the notes can force investors to accept shares of stock in repayment of the note rather than cash. Moreover, the notes are structured so that the amount of stock investors receive in case of a loss leaves them holding the bag for the entire amount of the loss. And to add insult to injury, after the threshold is triggered, the clock stops on any further income payments from the note, leaving investors with far less in total income than they expected when they first entered into the transaction.

A big bet
When shares don’t drop, the deals can work out exceedingly well. For instance, back in September, Citigroup Inc. (NYSE:C) sold structured notes on Facebook Inc (NASDAQ:FB) that paid a 17% yield for a one-year term, with a threshold loss of 35% below the roughly $19.35 per share price on the day of the note sale. Nearly six months later, Facebook shares have rebounded sharply, and the note buyer seems likely to get the full benefit of that 17% return.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!