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.

BREAKING DOWN '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. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Equity Linked Note - ELN

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

    A statistical measure of change in an economy or a securities ...
  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. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  8. Investing Basics

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
  9. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  10. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
RELATED FAQS
  1. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  2. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  3. Can a variable annuity be rolled into an IRA?

    You can roll qualified variable annuities, such as other qualified retirement plan accounts, into a traditional IRA. Non-qualified ... Read Full Answer >>
  4. Are variable annuities subject to required minimum distribution (RMD)?

    Variable annuities are insurance contracts that provide tax-deferred growth of assets that can later generate a guaranteed ... Read Full Answer >>
  5. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  2. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  3. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  4. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  5. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  6. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!