A synthetic is a combination of financial instruments often two, sometimes more designed to mimic another single security.
For example, you can combine an investment in redeemable preference shares which carry a fixed dividend similar to a bond with warrants giving you the right to buy a company's ordinary shares. That creates a 'synthetic' with a similar return to that on convertible bonds from the same firm.
Why bother? Maybe because the investment you want isn't available, so you create a synthetic instead. Tax also matters different securities are treated differently. Finally, you may be able to get higher returns from the synthetic than the mimicked security without significant extra costs.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Football fans issued warning over ticket scams ahead of 2026 World CupSantander customers lost more to football scams in the first six months of 2025 compared to the same period in 2024, when total losses surged due to the Euros
-
Nationwide fined £44 million over “inadequate” anti-money laundering systemsFailings in Nationwide’s financial crime processes between October 2016 to July 2021 meant one criminal was able to deposit £26 million from fraudulent Covid furlough payments in just eight days.
