Stock Market CDs questions..I recently posted a question about investing 1000 dollars in a stock market cd?

Question

that can garantee no loss in your starting investment and will most likely give you a higher interest rate than a regular cd account. From the answers I got they all said there was no such thing. But I came across this article when going threw some investing sites.

"Stock Market CDs pay interest based upon the gain in a related stock market index. These unique CDs permit investors to capture the upside possibilities of the market index but avoid the down-side risk. In other words, you can "play the market" but not worry about losing your starting investment because the deposit is FDIC insured and you are guaranteed to get back your original investment. Early withdrawals may be permitted and these CDs can be sold or can be redeemed fully upon the death of an owner or co-owner. CDs sold prior to maturity or withdrawn early are subject to market conditions and could result in a loss."

So what do you guys think about that?

Answer 1

Yes, they exist and I ignore them. As a professional investor I might buy one if the bank was offering me a really good deal, but they really are not.

What they are packaging for you is a CD that has bought a call option on an index. You could, yourself, buy a CD at the highest paying bank at www.bankrate.com and get a call to match its maturity. In fact, this used to be a very popular strategy until interest rates collapsed in '93.

What people used to do was buy, say a t-bill at 90 and a call for 10. The bill matured at 100 and the call was either worth a lot of money or nothing but you couldn't lose money ignoring inflation.

If you only had 1000 then it might not be such a bad deal as you could not buy a call with only a $1000 account. If you have more, the do it yourself strategy is cheaper and hence provides a better return on investment.

The big plus this would offer is that you know with certainty the CD matures with the option. The big minus is of course you need to wait for maturity or face a potentially stiff penalty. The market may rise and fall over the cd's life and you may miss the gain, something that an option would not have happen if you knew what you were doing.

Answer 2

First, don't think a tremendous kind of the solutions before mine. you'll desire a coupon broking service, like Charles Scwhab or Ameritrade or E-commerce and may open an account for free of charge. Your $1000 will then seem on your account and also you'd have the capacity to get admission on your account on line and make trades out of your pc. yet---with only $1000 you do not opt to be making a tremendous kind of trades, nor do you go with to be making an investment in only one inventory. the only thanks to "diversify" one of those small volume is to purchase a mutual fund or an ETF, (substitute traded fund), that is a mutual fund that trades like a inventory. for the reason that maximum mutual money have initial purchase criteria that are better than $1000, my suggestion is to commence scaling into an index ETF, along with the secret agent. that is an ETF which invests interior the S&P 500 index, so that you get tremendous diversification, besides the actuality that in case you only purchase one or 2 stocks. commence paying for one or 2 stocks even as the marketplace appears below usual. For this you'll favor to maintain on with the marketplace, that you will be able to actual do on CNBC, a cable economic information channel. Bloomberg and Fox actually have economic channels, so verify your cable service to be certain which of those is presented in over your cable. do not assume to make a lot money with this methodology. yet you received't lose a lot both. optimistically, as you study about making an investment, you'd be including on your funding account. yet keep on with the secret agent till you've about $10,000 amassed. only keep including on your determination of stocks once you think the marketplace is low. carry close on on your stocks alongside the way. upon getting about $10,000 and function discovered a great deal about making an investment, you could commence to make judgements about unmarried stocks. study all of Jim Cramer's books on making an investment and commence staring at "Mad money" and "quick money" on CNBC. there's a lot to study, so be affected man or woman and keep at it.