Certificates of Deposit, or CDs, are investments that offer you a payout after a fixed term, usually around five years. The U.S. Securities and Exchange Commission offers this information on their website. Equity linked CDs base your interest on a specific stock market index, so you have the potential for significant gains. While you have the risk that you won’t get any gains, you don’t have to worry about losing your principal. Your initial investment is guaranteed by the financial institution with which you invested. The protection of FDIC insurance is a big reason why many people choose an equity linked CD as an investment.
There are a number of options and terms to understand when you compare equity linked CDs with other investments. A liquidity risk is associated with the investment, so make sure you will not need the money before your specific term is up. Not only will you likely incur penalties if you withdraw your money early, because of market risk you may receive less than your initial investment if you take the money out too soon. Check to see if there is a call risk associated with your equity linked CD. If so, a called CD may yield you less if it is called before your term is up.
FDIC insurance should cover your equity linked CDs original investment and interest. Always make sure that there are no limits to the FDIC insurance for your particular investment. Check into how your return is calculated because may products take averages into account rather than the exact closing price of your stock market index on the date of maturity. This could be to your benefit in a declining stock market. Be aware of your participation rate and any caps on your return. If your participation rate is not 100%, you will get less than the actual stock market return when your return is calculated. The same goes for any cap on your interest rate. Even if the market increases 20%, if your cap is 10%, your gain will be 10%. Equity linked CDs have different tax consequences than an annuity or other investment, so talk to a tax specialist about how that might affect you.