Equity-Linked Security - ELKS

AAA

DEFINITION of 'Equity-Linked Security - ELKS'

A hybrid debt instrument that is linked to the equity markets. Equity-linked securities can be in the form of a single stock, a group of stocks or an equity-based index, such as the S&P 500.

The return on investment is dependent upon the performance of the underlying equities that are linked to the security. This type of security will often offer a guarantee of principal plus perhaps a small gain in return for a reduced payout of equity gains.

INVESTOPEDIA EXPLAINS 'Equity-Linked Security - ELKS'

Equity-linked securities first appeared in the 1990s and have been offered in the form of annuities, mutual funds and CDs. Most equity-linked securities will limit the equity gains that their investors can realize, either in the form of a reduced percentage of gains (such as 70% of all gains with no limit), or an absolute cap (meaning that the investor gets 100% of the gain up to a certain amount each year in total return, such as 10%).

For example, an investor with a 70% cap will see $7,000 of gain from a $100,000 investment if the underlying equities post a 10% gain for the year. However, the same investor with the same investment amount in a security with a 10% cap will only see the first $10,000 of gain in a year even if the underlying equities rise by 50%.

RELATED TERMS
  1. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  2. Underlying

    1. In derivatives, the security that must be delivered when a ...
  3. Derivative

    A security whose price is dependent upon or derived from one ...
  4. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
  5. Equity Linked Note - ELN

    An instrument whose return is determined by the performance of ...
  6. Index

    A statistical measure of change in an economy or a securities ...
Related Articles
  1. What Is Market Efficiency?
    Active Trading

    What Is Market Efficiency?

  2. Enhance Your Portfolio With Active Equity
    Trading Strategies

    Enhance Your Portfolio With Active Equity

  3. Are Derivatives Safe For Retail Investors?
    Options & Futures

    Are Derivatives Safe For Retail Investors?

  4. Hedge Funds Hunt For Upside, Regardless ...
    Options & Futures

    Hedge Funds Hunt For Upside, Regardless ...

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center