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MITTS - The Upside of Stocks Without
the Downside Risks [2005-06-01]
MITTS - The Upside of Stocks Without the Downside Risks. 2005-06-01
Most investors are totally unaware that you can actually buy stocks 100% risk-free.
You can participate in all the profits when the value of the market goes up. But, when the market goes down, you are guaranteed to get back your initial investment.
If you want to invest in stocks in a volatile market, this is the way to do it.
MITTS are Market Index Target-Term Securities. They are not new and have been around for about 10 years. However; you rarely find any coverage of them in the financial press.
Pioneered by the Merrill Lynch brokerage , MITTS are essentially zero-coupon bonds with five- or seven-year calls on a major market index attached. This may sound complicated, but its not really..
MITTS sell for around $10.
About $7 of your investment goes to buy a zero-coupon bond that will yield $10 at maturity in, say, 2006.
A "zero coupon" bond, is one in which the interest rate is zero. Instead, you get a fixed return at maturity. It's like lending your friend $50 and them agreeing to pay you back $60 next year. There's no interest rate attached to your loan, you have just agreed on a fee and a date. That's essentially all a zero-coupon bond is.
The other $3 goes to buy "call options," basically small bets on the options market, that a particular market index will head higher. At the maturity of the MITT, you get back your original investment, plus whatever percentage the particular index has risen.
In essence this is how these MITTS work. All you have to know is that you are guaranteed to get back what you started with and if the stock market your MITTS is attached to goes up, you will make a profit. If it goes down, you won't. But you'll never get back less than what you started with.
You can buy a MITTS that is tied to just about any stock market.- the Dow Jones, the NASDAQ, the NIKKEI, the Russell 2000 etc etc... the list goes on and on. In all there are 27 MITTS you can buy.
For example if you buy Dow Jones MITTs (symbol: DJM), you get back your original investment plus whatever percentage the Dow Jones Industrial average goes up.
If the Dow goes up 30%, you get a 30% gain. Your $10 becomes $13. If it goes up 100%, you double your money. Your $10 becomes $20. Say the Dow drops 20%. What do you get? Your original investment.- $10. In other words, no matter how low the Dow drops, you won't lose money.
You are not locked into a set term, because MITTS trade exactly like a stock. You can buy and sell them during market hours every day.
What's important to remember is that there are only two ways to lose money in MITTS:
As mentioned earlier, there are 27 possible MITTS to choose from.
- If you buy the MITTS at a price above $10, and the value of the index falls between now and maturity, causing the MITTS' ending value to be $10 a share.
- Or, total catastrophe, either Merrill goes out of business or the U.S. Treasury doesn't pay on it's zero coupon bonds.