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

mookie123: Stock Market CDs questions..I recently posted a question about investing 1000 dollars in a stock market cd?
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 CDs sold prior to maturity or withdrawn early are subject to market conditions and could result in a loss.”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?

Answers and Views:

Answer by OPM
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.