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. Equity Linked Note - ELN

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

    A statistical measure of change in an economy or a securities ...
  4. Derivative

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

    A derivative instrument with underlying assets based on equity ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
Related Articles
  1. Active Trading

    What Is Market Efficiency?

    The efficient market hypothesis (EMH) suggests that stock prices fully reflect all available information in the market. Is this possible?
  2. Trading Strategies

    Enhance Your Portfolio With Active Equity

    This strategy provides the potential for larger returns while using less capital.
  3. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  4. Options & Futures

    Hedge Funds Hunt For Upside, Regardless Of The Market

    Hedge funds seek positive absolute returns, and engage in aggressive strategies to make this happen.
  5. Retirement

    Index-Linked Certificates Of Deposit: Upside Potential, Low Risk

    Index-linked CDs generate returns similar to indexes, without the potential for loss.
  6. Mutual Funds & ETFs

    Index Investing

    Get to know the most important market indices and the pros and cons of investing in them.
  7. Options & Futures

    Avoid Future Shock By Protecting Your Portfolio With Futures

    Worried about protecting your portfolio of diversified stocks and assets? Using futures with correct strategies can help.
  8. Professionals

    Are Alternative Mutual Funds, ETFs Right for You?

    Alternative mutual fund and ETFs are gaining popularity but are they a good idea for your regular Joe investor?
  9. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.
  10. Investing

    Active Funds: Getting What You Are Paying For?

    Fund investing could have hidden costs that can potentially make a big impact on your final return, particularly over the long-term.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center