Reverse Convertible Securities


Reverse convertibles, which originated in Europe in the 1990s, were first marketed to the U.S. market around five years ago, aimed at small investors.

I never heard of these type of investments until recently…probably because the yields on traditional debt instruments are low and investors want to make up their stock market losses quickly. On the surface, the reverse convertible security looks like a good investment.

Reverse convertibles are unsecured — and sometimes unregistered — short-term notes, typically with a duration lasting six months to two years, linked to the price of an underlying stock or stock market index. These securities are created by underwriters, such as Merrill Lynch, not the underlying stock company.

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