Stock Market-Linked Bonds
It is possible to buy bonds which are linked to the stock market. A bond is usually a certificate which confirms that you have made a 'loan' to a company, in that you have invested money in their business without receiving a share in their profits (a share certificate) in exchange. These bonds can either be repaid to you at an agreed time with interest, or repaid to you at an agreed time based on their stock market-linked value. There are many stock-market linked bonds on offer, which entail various levels of risk. These should not be confused with bonds that are not connected with the stock market, which are seen as extremely secure, low-risk investments; these offer to return your invested capital in full with interest at the end of the investment period, and increase it in-line with inflation to ensure your money retains its buying power.
Stock market-linked bonds essentially promise investors good returns on their invested capital. You will generally have to invest your money for a certain period of time, usually between one and five years. The money you invest will often be handled by a broker, before it is invested in the financial market by specialists working for large financial institutions such as banks: in the UK, Abbey National runs a specialist service, the Abbey National Treasury, which invests money on behalf of brokers. Your money is invested with the aim of meeting the promises made by the broker; you may have chosen a risky investment portfolio or one which protects your capital from significant losses.
There is usually no guarantee with stock market investments that you will not lose any of your money. You are however able to reduce the risk by deciding how the money is invested. Generally stock market-linked bonds will work in one of two ways. Either you will receive a regular income from your investment and receive your original capital and some reduced returns when the investment period is over, or you will agree to wait until the bonds 'mature', that is, reach the end of the investment period, and receive your original capital and your investment returns both at the same time. If you choose to receive a regular income from your investment, you will usually be investing in what are called 'precipice' bonds, or 'high income' bonds, also called 'guaranteed growth' bonds and 'recovery' bonds. For more details, see Precipice / High Income Bonds. If you would prefer to invest your money and receive your returns at the end of the investment period, you will usually be advised to invest in 'guaranteed equity' bonds, also known as 'guaranteed capital' investments and 'capital protected' investments. For more information, see Guaranteed Equity Bonds (GEBs).
