Of course, that experience shows another trade-off of investing in structured notes: Your return is limited to the income payments. Buying shares of Facebook on that day in September would have produced total returns of 50% or more, well ahead of the 17% return on the notes. In fact, the best result for notes compared to the stock comes when the share price falls by just less than the threshold amount, allowing noteholders to get paid in full with interest and without having to accept depreciated shares as payment.
Beware of Wall Street “innovation”
The lesson here is the same as it is for all the new products that come out of Wall Street’s toolbox: View any product with skepticism, especially if it has attributes that look too good to be true. Trading all your upside for current income isn’t automatically a bad strategy, but it’s essential to understand the risks involved, especially if you’re retaining a big part of the downside exposure from a stock.
The article How to Lose Billions on This Fad Investment originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger owns shares of Apple. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Apple, Facebook, and Goldman Sachs. The Motley Fool owns shares of Apple, Citigroup Inc (NYSE:C) , and Facebook.
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