During the investment period of equity-linked notes, investors are equivalent to holding bonds of the note issuers. If the note issuer defaults or bankrupts during this period, the investor will have to claim the money from the note issuer as a creditor. It is possible that part of or the entire value of the investment could be lost.
2. Price fluctuations of the underlying
The derivative feature of equity-linked notes is that ELNs generally sell put options linked to the underlying stock. Therefore, if the price of the underlying stock is lower than the strike price on the maturity date, the investor will purchase the underlying stock at the strike price.
3. Not equivalent to direct investment in underlying stocks
The investment in equity-linked notes is not equivalent to investing in the underlying stocks. During the investment period, investors will not have any rights to the underlying stocks, such as receiving dividends or exercising voting rights. If the underlying stock outperforms during the investment period, the value of the equity-linked note may not change accordingly, so its performance may lag behind the underlying stock.
4. Liquidity risks of equity-linked notes
If investors try to redeem the equity-linked notes earlier than the maturity date, they will need to request for early redemption from the note issuer. However, the issuer does not guarantee that it will provide investors with a quoted price from the secondary market as equity-linked notes are traded over-the-counter and the market is not active as secondary market.
