Equity Linked Investments (ELI) 101

Under volatile market conditions, stock prices may fluctuate sideways within certain range, leaving you indecisive.

You may choose to invest in Equity Linked Investments (ELI), equity-linked structured products to potentially earn a dividend return. Some of the ELIs are embedded with a features which is partial capital protected at maturity which may help you manage your risk in advance.

When subscribe an ELI, you can predetermine a “strike price” (commonly known as “purchase price”), which is your preferable price and usually lower than the initial stock price. Upon maturity, if the closing price is below the strike price on final fixing date, you will receive stock by the strike price, and the market value of the stock you are buying at that time will be less than your invested principal amount. On the other hand, if the closing price is above or equal to the strike price on final fixing date, you will receive your principal amount and potential return.   

Now you have an idea of the basic product features of ELI and the results of investing in ELI in general. You may wonder: How should I choose an ELI? Let's explore more on how to choose an ELI. 

The following section will be divided into 2 parts, including 3 key features and 3 main types of ELI:

The cash distribution rate denotes the extent of potential dividend you can earn. Generally, the cash distribution rate and the chance of receiving physical settlement is proportionate, hence the risk increases when the potential return rises. If the stock closing price on final fixing date is above or equal to the strike price, you will receive the total amount of principal plus a dividend at the cash distribution rate.  Unlike stocks, even if there is a slight drop in the underlying stock, ELI may allow you to receive your invested principal and potential cash dividend amount as long as the closing price does not fall below strike price on final fixing date. 

The outcome of your investment depends on the stock price of the underlying stock. You can choose your preferred stock based on your risk tolerance level, holding capacity, perception of stock price movement, etc. Some investors have switched their attention to US stock market in recent years due to larger market size and a wider selection of stock choices. Currently, certain eligible underlying stocks of ELI are from  US or HK stock markets, providing you with diversified choices.

ELI allows you to link multiple preferred stocks, you may link up to a maximum of 4 underlying stocks to your ELI. Generally, the more stocks the ELI is linked to, the higher potential return rate (subject to the actual situation), however, the risk will be relatively higher. You must beware that if the stock price falls below the strike price on the final fixing day then your principal will be converted to the worst-performing stock (or cash equivalent in accordance with your selection on mode of settlement) with the greatest price drop at predetermined strike price.

You may set up your ELI with an airbag feature or partial capital protection feature, you will predetermine an airbag level or base redemption level which is at a level below the strike price. Even if the underlying stock performs poorly, as long as the closing price is above the relevant level on the final fixing date, you will still receive your principal amount and potential return (If applicable).

The 3 key features as mentioned above will not only determine investment return of ELI, but also closely associated with the risks of the product. For instance, the risk level of an ELI product that consists of a basket of (linked to 2 or above underlying stocks) will be higher than a single underlying stock, as you are bearing with the risk of multiple stocks at the same time. Hence, you should strike a balance on the above key features in order to align with your investment goals and your risk tolerance level.