I am considering investing in a reverse convertible. How should I protect myself from loss?

 

A: Reverse convertibles are considered high-risk investments and are not suitable for everyone.  According to the Financial Industry Regulatory Authority (FINRA), a reverse convertible operates like a package of financial instruments that usually has two components – a debt instrument and a derivative.

You need to understand the risks associated with reverse convertibles.  For example, you face the risk of the stock or asset dropping in value and the possibility that the issuer won’t be able to repay its debt obligation.  There are even more risks, which we discuss in our article, Risks of Reverse Convertibles.

FINRA also suggests that you can protect yourself by being “wary of any advertisements or sales literature suggesting that reverse convertibles are safe and suitable for investors seeking high yields.” These ads tend to downplay the risks of these investments.

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