Secondary Trading
A structured investment may trade in the secondary market after the new issue offering period is completed. The secondary market is crucial in providing liquidity to investors looking to buy or sell prior to a particular structured investment’s maturity date. An investor can request a bid level to sell the security or an offer level to buy the security in the secondary market, subject to available inventory. Incapital and the issuer of the structured product, while not required to do so, will endeavor to provide bids and offers to maintain a secondary market. Investors who elect to sell a structured investment prior to the stated maturity date may receive an amount less than the initial amount invested in such product.
A financial professional, on behalf of an investor, may request a “live” bid or offer from Incapital for structured products. The financial professional may also request that Incapital “work an order.” Working an order allows Incapital to direct its network of over 600 broker-dealers and RIAs in an attempt to locate the best price in the market. The ability to access Incapital’s distribution channels will often lead to a better execution price. Ultimately, the decision to execute immediately or to work an order with the intent of achieving better execution will be subject to circumstances and individual objectives.
Distinguishing Liquidity from Valuation
Although structured products do not have liquidity comparable to U.S. government bonds, investors may have the ability to buy and sell structured products in the secondary market. Investors should, however, be aware that the secondary market for structured products may be limited, or even illiquid; and due to this, if the investment is not held to maturity it may be worth less than the initial investment.
There are many factors which impact the pricing of a structured investment. As discussed in the “Why Structured Investments?” section, the structured investment is comprised of bond and option components. Prior to maturity, the valuation of these components can be effected by a number of factors other than the price performance of the underlying asset(s), including:
(a) Interest Rates
(b) Funding/Credit Spreads of the Issuer
(c) Expected Volatility of Underlying Asset Prices
(d) Expected Dividend Levels
(e) Forward Price Curves
(f) Time to Maturity
It is possible, therefore, for the performance of the underlying asset, prior to maturity, to be consistent with the investor’s investment objectives and at the same time, for the secondary price of the structured investment to be underperforming these objectives. For this reason, structured investments may best achieve their stated objective if they are held to maturity. By adopting a buy and hold discipline, investors may be able to isolate the key variable which was the impetus to the trade, the underlying asset price performance.