Equity-Linked Security - ELKS

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. Equity Linked Note - ELN

    An instrument whose return is determined by the performance of ...
  2. Security

    A financial instrument that represents an ownership position ...
  3. Hybrid Security

    A security that combines two or more different financial instruments. ...
  4. 100% Equities Strategy

    An investment strategy for an individual portfolio or pooled ...
  5. Rate Of Return

    The gain or loss on an investment over a specified period, expressed ...
  6. Equity Derivative

    A derivative instrument with underlying assets based on equity ...
Related Articles
  1. Bonds & Fixed Income

    Long-Term Investing With Equity Index CDs

    Equity Index CDs are perfect for investors who don't mind hanging in for the long term.
  2. Bonds & Fixed Income

    What's a Hybrid Security?

    A hybrid security combines two or more financial instruments into one security.
  3. Professionals

    Equity Securities

    Series 62
  4. Investing Basics

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  5. Professionals

    Introduction

    Series 7 - Section 3: Equities
  6. Mutual Funds & ETFs

    Investing in Hedge Funds Vs. Private Equity in 2016

    Discover how hedge funds and private equity face challenging market environments in 2016 and learn about funds that performed well in 2015.
  7. Investing Basics

    How Will Your Investment Make Money?

    Discover the basic types of investment income and which asset classes pay them.
  8. Active Trading

    What's a Marketable Security?

    Marketable securities are financial instruments that can be readily bought and sold in a public market. The key feature is the ease with which it can be sold and converted into cash. Usually, ...
  9. Fundamental Analysis

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  10. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
RELATED FAQS
  1. What are the differences between debt and equity markets?

    Understand the basic, fundamental differences between the two primary investment markets of debt securities and equity investments. Read Answer >>
  2. What is the difference between the equity market and the fixed income market?

    Discover the differences between equity markets and fixed income markets, along with specific information about each type ... Read Answer >>
  3. Are mutual funds considered equity securities?

    Find out why mutual funds, like stocks, are equity securities, including the similarities and differences between investing ... Read Answer >>
  4. What are the most popular assets for investors?

    Learn about the most popular asset classes in the United States for different types of investors. Explore the risks and benefits ... Read Answer >>
  5. How does the risk profile of private equity investments compare to those of other ...

    Learn how the risk profile of private equity investment compares to other asset classes and the aspects investors should ... Read Answer >>
  6. Why would a company use a form of long-term debt to capitalize operations versus ...

    Learn about the different consequences of using long-term debt versus equity to raise capital for business activity, and ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center