The definition given by the S.E.C. (Securities and Exchange Commission) in Rule 434 says that these are "securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor's investment return and the issuer's payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows"
In simpler words, these are securities created or designed through a process of financial engineering whose value or price is based on the price of other traditional financial assets such as bonds or stocks. In this sense, they differ radically from basic securities such as bonds (which represent a debt of the issuer to the holder of the bond and the right of the holder to receive interest and the repayment of the capital at maturity) or shares (which represent a share of the holder in the capital of the issuing company and therefore a right to receive dividends on the profits of the company).
These kinds of products have become relatively popular with certain types of people because they offer certain protections against price fluctuations of the underlying assets and - in certain circumstances - attractive periodic payments similar to those of a bond but subject to the fulfillment of several conditions.
However, generally, the formulas for calculating the value of a structured security are highly complex, since they depend on a set of market situations that are unpredictable at the time of their creation and sale to the public and this means that in practice "investing" in a S.S. be much more similar to playing in a casino than investing itself.
Perhaps old-fashioned, we still think that investing is an act of participation in public and private economic development, in which individual investors make mutually profitable businesses with companies that need capital for their ventures and give it to them by lending it (buying bonds) or giving it in exchange for ownership interest (buying stocks). Only in this way does the capital market have a socially acceptable and desirable justification for the development of a society. Unfortunately, this concept has been distorted, giving rise to any kind of derivative securities that have little to do with this economic function but are attractive to all who like gambling and chance.
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