Equity linked CDs are like a combination of traditional CDs, or certificates of deposit, and stocks. According to Money-Rates Columnist Richard Barrington, equity linked CDs are somewhat of a hybrid between the two products. In a volatile stock market investors can either lose a ton of money or manage to buy low and grow their wealth significantly. Investors looking for a bit of the best of both worlds may be interested in equity linked CDs. They offer investors the same stability of traditional CDs because they are FDIC insured and guarantee your principal as long as you hold them to their maturity date. Since equity linked CDs are also tied to a specific stock market index, investors receive part of that index’s return over the period they held the CD. While it seems like you are getting the best of both worlds, there are terms with each equity linked CD of which to be aware.
The author states that there are five factors you need to look at when you compare equity linked CDs. The investments can be tied to many different equities, so you should look for one tied to the specific index with the type of return you are seeking, for example the S&P 500. You want to get a participation rate as close to 100% as possible because that rate dictates what percentage of the actual market return you will receive. Some equity linked CDs have a cap on the amount of money they will pay out to you as a return, so make sure you only purchase one with a cap in which you are comfortable. Check into how your gain will be calculated because some are averaged and can lessen the amount of your return. Make sure that FDIC insurance will cover the entire amount of your investment when you have a significant amount of money to spend. Fixed indexed annuities are a similar type of investment, but there are some tax benefits to the annuities. Both products are definitely worth investors checking out.