Equity-linked

Equity-linked describes a financial instrument, product, or investment whose value is directly tied to the performance of an underlying equity or stock market index. This linkage can manifest in various ways, such as returns mirroring stock performance, or through the use of options, derivatives, or structured products where the payout depends on equity movements. Essentially, the financial outcome of the instrument is correlated with, and determined by, the fluctuations in the equity market or a specific stock. Risk and reward are directly proportionate to the market's performance.

Equity-linked meaning with examples

• The equity-linked note offered by the bank promised returns tied to the performance of the S&P 500 index. This meant if the index rose, the note's value would increase. The bank also guaranteed a portion of the principal. It was a way for investors to participate in market gains without directly owning the index, yet was still highly exposed to market risk.
• Many variable annuities include equity-linked subaccounts. These accounts' returns vary based on their allocation of stock. Investors can switch between a fixed income and an equity linked component. It allows the investor to participate in the stock market while retaining some of the guarantees and features typically associated with annuities.
• A company issued equity-linked warrants that gave holders the right to purchase the company's stock at a predetermined price. The value of the warrants was therefore directly related to the underlying stock price. This provided the company an extra incentive to improve its performance.
• Some insurance products are considered equity-linked. The returns in these products hinge on the performance of investments in the equity market or particular stock. These plans are not usually ideal for risk-averse individuals. These types of products often have additional fees.