Apple Reverse Convertible Notes Mean Potentially Huge Losses for Investors Who Bought Them From UBS and Other Banks
Those who invested in many of the commonly called "Apple reverse convertibles," now find themselves facing huge potential losses. But all hope is not lost, as investors may be able to recoup their losses.
The plight of these investors has been well documented recently.
What would you do if your broker tells you that you just bought Apple stock at a price of over $700 a share, even though after this past week's collapse left the price hovering below $440? Now what would you do if you found out that you wound up with this "bum deal" by buying a product that was issued by your broker's firm?
Jason Zweig of the Wall Street Journal addressed this situation in his recent report on how individual investors lost potentially hundreds of millions of dollars in structured products linked to Apple stock, while the firms and brokers who sold them made a profit.
These products were typically marketed to investors as being like bond investments, but promised substantially higher interest rates between 6-12%. However, this came with a catch - if the stock fell more than 20% or so by the date of maturity, the bonds morph into shares of the underlying stock on the maturity date. This means an enormous, sudden loss to the investor.
Over $722 million of these investments have been sold. Many investors who bought these investments, such as UBS's "trigger yield optimization notes" in the past year have seen the value of the underlying Apple stock drop from over $700 to south of $440 per share, which means that these investors are staring down the barrel of an enormous loss - estimated to be around 30%. At the same time, the banks that sold these products reaped a large profit, sometimes nearly 2% of the total investment.
Many products such as these have been sold to conservative investors who were not willing to lose money - based largely on the historically positive performance of Apple stock. Investors often do not understand the complexities of these products, or others like them. In many cases, investors seeking safe income may not have been aware of this risk or had it downplayed to them, which could constitute a sales practice violation committed by their broker.
Unfortunately, as Mr. Zweig notes at the end of his article "Complexity always favors the seller, not the buyer. And the house always wins."
However, this does not have to be true. Investors have the ability to fight back against "the house."