The United States Securities and Exchange Commission has an informational page dedicated to equity linked CDs. They are certificates of deposit that tie your rate of return to a stock index’s performance. With FDIC insurance, equity linked CDs have an extra safeguard that other investment products do not. The terms vary with different banks, but these CDs usually have a term of around five years. When you compare equity linked CDs with other products, banks like to highlight the principal protection that they offer. If there is a downturn in the market, the original principal will not be affected.
There are things to consider when looking into an equity linked CD. They do not have liquidity before the term expires so they should not be used if you might need your money sooner than the five years or so. Market risk and call risk are associated with equity linked CDs. FDIC insurance covers the amount permitted by law, but always read all of the terms associated with the FDIC. Many returns are calculated by averaging the index’s closing price over a period of time instead of upon the maturity of your CD. Look into the equity linked CD criteria to find out the participation rate and whether or not there are caps associated with your product. Since equity linked CDs can have different tax benefits than regular CDs, make sure you know those before purchasing.
