In investing, what is a structured note and what is it good for

January 23, 2008 7:37 AM

Can you explain Structured Notes to me? Somebody suggested these as an investment vehicle that minimizes risk while magnifying the potential for gain. That's the kind of talk that makes my BS meter go off, and searching online produces a bunch of investo-speak that's probably clear if your a finance person but seems designed to muddy the waters of understanding for everybody else. Using non technical language, can you tell me what they are, what/who they're good for and what/who they are wrong for?
posted by willnot to Work & Money (4 answers total)

The idea is that a structured note is a hybrid security, one that might combine both debt and equity components. So while equity side might go up or down, the idea is that you've hedged against that move by an opposite move on the debt side. By combining multiple products you're using their combined characteristics to mitigate the dangers that they individually present.

But the general advice for anyone investing in anything, if you don't understand it - walk away.

Ask questions, by all means, but investo-speak is just a jargon that you don't understand. It's not necessarily there to muddy the waters (although sometimes it might very well be), sometimes it's there to describe a concept in technical terms something to be read by someone versed in the language.

But Investopedia is always a good first place to start.
posted by unsliced at 8:47 AM on January 23, 2008

"Structured Note" is a generic term for a huge universe of products ranging from the strictly professionals-only Collateralised Debt Obligations which are supposedly busily annihilating the financial system to index-linked bonds that retail investors can pick up at pretty much any bank (well, in the UK certainly).

The general premise in all the products is that (1) you take more risk in return for a better reward and, to a certain extent (2) you can customise the risk you're willing to take. However, they are most definitely not suitable for everyone.

This "Triple Asset Bond" offered by a UK Building Society is a pretty clear example of a retail bond and explains how the pay-offs work. However, the key is that the phrase "invest risk-free" is not the whole truth. It may be the case that you get your investment back when the bond matures in 2013 -- but in the worst case you'll have precisely zero return on it. In the meantime inflation will have eroded its value and you'll have lost the opportunity to invest it in something better (even a regular savings account). If you have money to play with and a strong view on, in this case, house prices and the direction shares will take over the medium term, it could conceivably be something to look at.

Have a read and I can try to clarify any jargon later.
posted by patricio at 10:29 AM on January 23, 2008

There's different kinds of structured notes, but they are all basically equal to a zero coupon bond and a derivative of something else (usually an option).

I've had to plow through term sheets of dozens of these things at work and I really don't think much of them (I've never seen one that didn't have eyebrow-raising fees or costs attached to it). And yes, anything you see will almost certainly be designed to obscure, rather than enlighten.
posted by milkrate at 12:15 PM on January 23, 2008

John Fortune & John Bird explain exatly what it means. It's British, and a little long, but probably accurate.
posted by growabrain at 2:17 PM on January 23, 2008