Equity linked CDs are lower risk than many other investments, yet they still expose you to possible gains in the market. They can also be called equity index CDs, or certificates of deposit, and they have been around for about 30 years. Investopedia’s Brigitte Yuille summarized the investment in “Long-Term Investing With Equity Index CDs.” As banks deregulated and more competitors came into to the equity linked CDs marketplace, the products became more popular. Their first introduction was after the stock market crashed and our recent economic downturn has led to a surge in popularity. Since the government backs equity linked CDs with their FDIC insurance, investors like this low risk product.
With traditional CDs, investors earn a fixed rate between 2% and 4% typically. Equity linked CDs are linked to an index market such as the Dow Jones Industrial Average. You have the potential for higher gains when you compare equity linked CDs to traditional CDs. Either the averaging or point-to-point method is usually used when banks determine the return for the maturity date. There are caps on some of these investments so if your rate had a 10% cap, even if the return was 14% you would just receive 10%. Other variables affecting your return include the participation rate, maturity time, movement in the index, minimum deposits, and guaranteed coupon rate.