An investor usually has to commit money for a set period of time. They only get to capitalize on any potential upsides once the end date is reached.

These products are assembled to satisfy a wide range of risk profiles, depending on investors’ needs.

Most such products offer a degree of capital protection. In other words, investors are guaranteed to get back at least the nominal value of their initial investment. However, certain products offer no such guarantees and are therefore riskier.

Typically, structured products are combinations of asset classes with predictable returns and more speculative instruments. A classic example is a low-risk bond combined with a stock call option. Such an arrangement lets investors secure a minimal level of return on par with a bond. At the same time, it gives them a potential upside if the market is favorable and they can profitably exercise their call option.

While there are dozens of different variations, they commonly fall into these three broad categories:

These types of products offer rather limited potential for any return on investment. Instead, as the name implies, they are used to protect capital during unfavorable market conditions (e.g. negative interest rates). Investors can secure returns comparable to deposit rates, with a minor upside.

The bond + option example above may well fall into this category of capital-protected products.

With this type of products, investors can choose to forego some principal guarantees to receive a higher return. Yield-enhancement products are more risky, but they allow investors to “bet” against the market. This way, investors can end up making profit while the stock market as a whole stagnates or goes down.

These products push both the risks and profit potential even further. Using leverage products, investors can achieve a rate of positive return that actually exceeds the increase in the value of the underlying asset itself. On the flip side, investors must also accept the possibility of losing the entirety of their invested capital.

In a nutshell, the price of a structured product is the sum of what it costs to buy its individual components plus the premium charged by the issuer. Depending on the issuer, they’ll either charge their premium fee separately or “bake it into” the price structure of the product itself.

For the casual investor, these tailored products may make sense for a number of reasons.

If you’re a trading professional, you’ll certainly be able to combine assets on your own to achieve the desired balance of risk and returns. But for the uninitiated, structured products offer a simple way to do the same without much effort or prior market knowledge.

Additionally, buying pre-packaged products may often grant an investor access to an asset class that they can’t purchase directly.

In general, you’re guaranteed to get your initial capital back,  unless you’re investing in the more speculative types of products. This compares favorably to buying stocks directly, as that makes you subject to the whims of the market without any true downside protection.

For this reason, structured products can be ideal for anyone looking to capitalize on potential market upsides without risking all of their money.

Because they can be assembled in so many ways using any combination of asset types, structured products are extremely flexible. They can be adjusted to fit your specific risk profile, include specific asset classes, or align with your predictions about future market trends.

Pre-packaged products are a way for investors to plug in holes in their investment portfolio or activate their money using the exact risk-return ratio they seek. Those with existing portfolios can hedge against unpredictable market movements. Others can capitalize on their market insights and predictions by e.g. securing positive returns in bear markets.

With such products, your capital is tied up until the end date of the contract. This affects the liquidity of your assets and limits your ability to continuously reinvest money based on new information.

Depending on the level of principal protection, investors will be exposed to market risk. This means it’s possible to lose some or all of your invested capital if the market takes an unfavorable turn.

Structured products are typically offered by investment or retail banks. They’re not backed by government bodies and are therefore subject to counterparty risk. What this means is that even if the product itself performs favorably, there’s always a risk that you won’t get your money. (Such as if the bank in question becomes insolvent or goes bankrupt altogether.)

The main way issuers earn money on pre-packaged products is by charging a premium for the service of putting them together. While this isn’t a risk per se, it means investors have a higher cost and may lose money on products that otherwise break even.