Advantages Of Equity-Linked Notes
Investors are aware that they may make a loss on some of their investments and some of their investments, especially real estate investments are not liquid. Hence most wealthy investors will try to diversify their investments to maximize their returns and also reduce the risk involved while ensuring that at least some of the investments are liquid.
Many of these investors are interested in trying new investment options, especially short-term investments, which will give them better returns than most other investment options available. One of the newer investment options for Singapore investors is equity-linked notes abbreviated as ELN.
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Definition
An equity-linked note (ELN) is a financial product that matures in a comparatively short time period varying from one month to twelve months. The investor is given the opportunity to purchase shares at a discounted price compared to the market price.
On the trade date, the stock’s spot price and strike price are decided. The investor has to pay the strike price on the settlement date a few days later after which the ELN is issued. If the ELN is for a duration of one month, the price of the stock is checked.
If the stock price is higher the investor will get the principal, and if the stock price is lower, he will get shares of the stock. So basically the investor is paying a discount to the principal and will get 100% of the principal on the maturity of the ELN. The difference between what the investor pays and the principal he is paid is the profit he makes on the transaction.
Eligibility
In Singapore only accredited investors are allowed to invest in ELNs. For an individual, the accredited investor should have net personal assets of at least two million dollars. Out of these assets, the financial assets should be worth at least one million dollars.
The income of the investor in the last twelve months should be at least $300,000 or equivalent in foreign currency. Businesses can also invest if they have assets of more than ten million dollars, as proved by the audited balance sheet of the company. Similarly, trustees of trusts can also invest to maximize returns on behalf of the trust.
Risk
The returns for an ELN are linked to specific shares, and if the value of the shares will decline, the ELN value will also decrease, resulting in a loss for the investor. There is an issuer for the shares which are used for the ELN. If the issuer defaults on his financial commitments due to any reason, the investor may lose part or all of his investment.
Unlike some deposits which are insured, there is no protection for the principal in the ELN. So if there is any financial problem, the investor could lose the entire principal or part of it. Additionally, the secondary market for ELNs is usually not liquid. So investors should not invest in an ELN unless they have sufficient liquidity and funds to remain invested in the ELN till it matures.
