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In a bull market, who can resist the opportunity to buy a stock at a discount from its current market value? When the market is bullish, investors seem to take more risk.
These financial derivatives provide buyers with a lot of upside potential when prices are on the rise. Unfortunately, when stock prices fall, the losses can be devastating.
Accumulator is essentially a contract in which the seller agrees to deliver a specified quantity of a commodity or other asset to the buyer at a pre-determined price on a series of specified accumulation dates over a specified period of time.
The contract typically has a “knock-out” price (the upper limit the security can reach before the agreement), which, if reached, will trigger the cancellation of all remaining accumulations.
As the name implies, this investing strategy involves the accumulation of stock over time and was quite popular in the US during 2006-07.
With the market decline during the Great Recession, stock accumulators were responsible for destroying a great deal of personal wealth. The strategy behind the accumulator contract is fairly simple.
On the one side of the contract is a buyer who believes a company's stock will trade within a given range for the duration of the contract.
On the other side of the transaction is the issuer, who believes the stock price will fall over a period of time.
Accumulator enables an investor to “accumulate” stocks at a pre-agreed price which is usually 10-20 per cent below the market price at the point of time when the contract was entered. Once you enter the accumulator, the price you pay for the stock is fixed.
As such, even if the stock price crashes, investors are still committed to continue to buy the stock at the pre-determined price until the accumulator contract ends.
Generally, investing in an accumulator is considered to be speculation.
There is an unlimited risk for investors in dealing with accumulators as they need to fork out money to purchase the stocks at a higher price compared with the market price.
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