Market lining is a risk management tool. It is a way to straddle the financial fence and have one foot in bonds and one foot in equities.
A market linked account is an interest bearing account with an equity ‘kicker’. The principal is never at risk. The account principal earns interest, but instead of paying that interest directly to the account owner, some or all of the interest is used to purchase an equity hedge (e.g. stock call option). A hedge is what businesses use to protect themselves from unexpected swings in financial and commodity markets. When the market rises the profits from the hedge are added to your account as additional interest. If the market declines, the interest spent on the hedge portion of your interest is lost. However, your principal is never in the market and never subject to market loss.
Market linked accounts can be found with a wide variety of structures and features, but all have the same dual nature. There are several other types of financial instruments that have twin personalities. Convertible bonds have a similar equity participation feature, as do warrants issued with preferred stocks or corporate bonds. However, both of these instruments carry market risk, because the underlying securities can decline in value. Market linked accounts have no market risk. The issuing institution guarantees the principal. Some of these guarantees come from giant insurance companies, others from banks. Like traditional CDs, bank issued market linked CDs are insured by the FDIC.
We all know that markets, especially the stock market, go up and down periodically and some of those ups and downs are substantial. The expectation in a market linked account is that over an extended period of time the market upswings will generate more than enough profit to offset the years that the account pays no interest or only a minimum interest guarantee. This is the same theory that stock investors use. Since they know the market will have declines, they assume that the market upswings will compensate them for the periods of substantial market loss. A market linked account will never make as much as stock account in a straight-up rip roaring bull market, because of the cost of the hedge. However, the market linked account will never show a loss. In a market linked account, one is trading some of the profit from the market up swings for total protection from all market losses.
This site is dedicated to informing consumers about market linking products and financial strategies that help you grow your assets without the risk of a stock market loss. Our mission is to provide meaningful information that you can use to make prudent choices when allocating your capital and building your wealth. We will only cover market linked accounts issued by banks and insurance companies. We dub these ‘institutionally issued market linked accounts’ and they include: CD’s, annuities and certain cash value life insurance policies.
There are a also number of market linked accounts issued by brokerage houses and investment management firms. These take the form of structured notes and the account principal is backed by the issuing entity. The methods used to tie these vehicles to market performance varies greatly from account to account and is beyond the scope of this site. It is our practice not to comment on these kinds of quasi-securities.
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