Stock Return Income Debt Securities (STRIDES)
What it is:
How it works (Example):
STRIDES are issued by Merrill Lynch. In a typical case, Merrill Lynch would issue STRIDES linked to a firm like Home Depot (NYSE: HD). Like preferred shares, these securities would assign a face value (say, $25 per share) and an annual interest rate (say, 10%). The interest is usually paid to investors quarterly.
One thing that makes STRIDES unique is that when they mature (usually around two years from their issue date), investors are re-paid in shares of the underlying firm rather than in cash. The number of shares is often determined by a multiplier, which is set on the date the STRIDES are originally issued and is included in the security's prospectus. Since this multiplier doesn't change, it means as the price of the underlying stock increases, so too will the value of the STRIDES.
STRIDES are also callable after a specific date (usually one year after they are issued). If this happens, the investor instead receives a cash payment equal to a specified annual yield to call(say, +20%). This means the investor participates in the "ride up" in the stock price but gives up any appreciation and coupon payments beyond the specified yield to call.
STRIDES holders do not receive voting rights, common share dividends, or other rights attributable to common stock holders.
Why it Matters:
STRIDES allow investors to participate in the stock appreciation of a given company while getting predictable current income in the form of interest payments. However, the predetermined yield to call means STRIDES potentially cap investors' gains. There is also a risk of loss should the underlying company's shares fall in price.
To read more about STRIDES and the advantages they offer, read our recent article Earn High Yields On Stocks that Don't Pay Dividends.