Reverse convertibles, which are a type of structured product, are interest bearing notes in which principal repayment is linked to the performance of a reference asset, often a stock, a basket of stocks, or an index. The reference asset is generally unrelated to the issuer of the note. At maturity if the value of the reference asset has fallen below a certain level, the investor may receive less than a full return of principal. The diminished principal repayment could be in the form of shares of stock put to the investor or their cash equivalent. Reverse convertibles expose investors not only to the risks traditionally associated with fixed income products, such as issuer risk, but also to the risks of a decline in value in the underlying reference asset, which can lead to loss of principal. Reverse convertibles tend to have limited liquidity and complex pay-out structures that can make it difficult for registered representatives and their customers to accurately assess their risks, costs, and potential benefits.
Most investors are not capable of evaluating whether reverse convertibles are suitable investments. What investors should recognize is that reverse convertibles put principal at risk if the price of the underlying security rises above or falls below a predetermined amount. The issuer will either sell or buy the security, which may cause investors to lose a significant amount of principal. However, investors are attracted to reverse convertibles because of their yields; reverse convertibles have averaged 13% in certain years. This comes as no surprise since yields on CDs and other conservative investments are near all-time lows, and fixed income investors need to generate income to pay bills and keep up with increasing costs. Still, investors must realize that reverse convertibles are not the solution. Rather than chase yields and risk losing hard earned savings, investors need to stick to what is suitable for them to avoid financial calamity.
Have you suffered a loss in a reverse convertible? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.