Equity Linked Investments (ELI) 101

Potential opportunity to grow your wealth under volatile market

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.   

Scenario in general Receive stock? Returns (if any) to be received at maturity

The stock closing price on final fixing date is above or equal to strike price

No. Receive principal amount in cash

Predetermined potential return based on the ELI

The stock closing price on final fixing date is below strike price

Yes. Principal amount
will be converted into stock

Predetermined potential return based on the ELI

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. 

ELI's key features

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

1. Cash distribution rate:

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. 

2. Underlying stock:

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.

3. Airbag/Partial Capital Protection Feature:

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.

Three main ELI types

In addition to the 3 key features, there are also 3 main ELI types to help you formulate your investment strategies based on your investment goals.

1. Callable ELI

ELI will be early terminated before maturity if the closing price of the linked stock is above or equal to the call price during the callable period. You may receive the principal amount plus any potential cash dividend amount accrued up to the relevant call date.

Callable ELI not only provide you with an option to gain dividend on a regular basis, but may also give you an opportunity to receive your cash dividend amount along with your principal amount before maturity.

Generally, if you hold a view that the performance of the underlying stock will be stable or growing moderately, you may consider to select this type of ELI.

2. Bull ELI with potential upside cash distribution

Depending on the change in stock price, if the stock price of the underlying stock increases by more than the predetermined cash distribution rate, you may receive the higher of the percentage of stock price increase as potential return. For instance, if the cash distribution rate of your ELI product is predetermined at 6%, and if the underlying stock price has risen up to 12% on the final fixing date, your cash distribution rate will be set at 12% instead due to the increase in final stock price (e.g. 12%) is higher than your predetermined cash distribution rate (e.g. 6%).

Generally, if you hold a bullish view on the performance of the underlying stock, you may consider to select this type of ELI.

3. Bull ELI with potential upside cash distribution and partial capital protected at maturity

The mechanism of the third type of ELI --- “Bull ELI with Potential Upside Cash Distribution and Partial Capital Protected at Maturity” is close to the second type of ELI (e.g. Bull ELI with Potential Upside Cash Distribution), but embed with partial capital protection feature and the payoff upon maturity will be in cash only.

This type of ELI not only provides you with an opportunity to earn potential return which is in line with the rate of increase in the stock, but also equips you with capital protection all the way until the maturity. The capital protection level can cover up to 99.9%.

Generally, if you hold a view on the performance of the underlying stock to be rising significantly, but at the same time wish to diversify the risk and to manage the loss when the market fluctuates, you may consider to select this type of ELI. 

ELI's risks

It is worth noting that some ELIs are not capital-protected, and you will be exposed to the market risk associated with your holdings when you are required to meet your delivery obligations on the maturity date. Your holdings may become worthless due to a significant drop in value. For more information on Hang Seng Equity Linked Investments, please visit our product page.

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