Equity-Linked Notes (ELNs)
An Equity-Linked Note (ELN) is, as the name suggests, a note, or debt instrument. Unlike standard fixed income securities that provide regular income when sold before maturity at a price higher than the purchase price, an ELN’s payout is based on underlying entity it is founded on.
ELNs are generally based on a stock, or collection of stocks, or even equity indexes. ELNs are typically principal protected, which means the investor is guaranteed to receive all of the original amount invested in the ELN, however the investor will receive no interest. There are other types of ELN that do not offer investors this protection, and in those cases, the bank is not required to reimburse the investor's full principal at maturity, and the amount the investor does receive will depends on how far below the “barrier” the equity price has fallen.
Typically, the final payout is the amount invested, plus the gain in the underlying stock or index times a note-specific participation rate. A participation rate is the amount that the ELN investor participates in the appreciation of the underlying equity. Generally the participation rate is set at 100% which would mean a 10% increase in the underling equity.What are the Downsides?
There has been a large push from Wall Street to sell ELNs lately, likely because of the facially appealing guaranteed payout. Remember, the most you can lose in a principal protected ELN is the interest you would have accrued had the underlying stock made money.
What brokers either fail to realize, or fail to share with their customers is the inherent higher risk with ELNs than other investment avenues. In an effort to receive a higher interest, you must be able and willing to accept the risk of purchasing the underlying equity at a price that is higher than the market price at the date of maturity.
Additionally, and ELN is beneficial only when held to full maturity, and sometimes not even then. If you need to sell the ELN back to the bank at any point before maturity, the amount you receive will be significantly less than the original amount you invested.Do I Have a Case?
If you or someone you know has lost money as the result of an ELN, you may be entitled to financial compensation. Contact the dedicated and experienced securities attorneys at Fitapelli Kurta today for your free consultation. Our law firm prosecutes cases nationwide on a contingency fee basis so do not delay. Call now.