Consumers are cautioned about the potential risks of "high-yield" equity-linked products.
The Consumer Council is concerned about the general lack of consumers' awareness and understanding of the exact nature of these new emerging investment products - their special characteristics and related risks.
Driven by heavy advertising, equity-linked products are proliferating rapidly with consumers eager to seek high-yield investments at a time of negative real interest rate and inflation.
The products are being marketed by brokerages and banks as high interest-bearing and requiring only a relatively low entrance fee (as low as $10,000) ideally suited to many a retail investor.
The Council's survey has found equity-linked products to assume different names by their sellers such as ELN (Equity-linked Note); ELI (Equity-linked Instrument); ELD (Equity-linked Deposit) etc.
The concern is that consumers may be easily confused by the different names used, particularly in the case of "Equity-linked Deposit" by some banks and issuers.
Consumers unaware of the nature of these equity-linked products may regard them as a substitute of saving deposit or time deposit. This could not be further from the truth.
The truth is equity-linked products, however named, can in no way be construed to be the same as the traditional saving deposit or time deposit which enjoys guaranteed interest return and protection of the Deposit Protection Scheme.
They are in fact structured investment products with embedded "short" positions in options (usually stock options) over an underlying stock or a basket of stocks.
Their purportedly high interest yield is not a guaranteed but only potential return. In some adverse scenarios, investors may stand to lose even their principal to a large extent.
As an example (in the case of bull equity-linked product), if the stock price falls far below the exercise price (purchase price) at the pre-determined valuation date, the investors will be obligated to buy the underlying stock, thus incurring a huge negative price differential and loss between the exercise price and the current stock price.
The potential loss will be realized only if the investors sold all the stock on the maturity date. On the other hand, investors also has the option to hold the stock for selling later when the price goes up.
Therefore, whether the equity products are linked to only one stock or a basket of stocks, consumers are reminded to evaluate the quality and prospect of each selected underlying stock and assess the potential profit and loss under different scenarios.
It will do well to bear in mind that as a general rule (in bull equity linked products), the higher the stock exercise (purchase) price the higher the potential return. But the reverse is also true: the higher the yield the higher the risk at the same time, all other factors being equal.
The survey also found that equity-linked products are supposedly free from any subscription fee. Actually, the associated fees and charges are already deducted from the potential return to the investors.
Since the service charge is not separately listed out, investors are generally unable to compare the levels of service charges among different brokerages and banks, and hence cannot judge whether the fees are justified and reasonable.
Given the increasing popularity of such investment products, consumers are reminded to deliberate carefully, with a thorough understanding on the products and all relevant documents and then risk assessments, before making any investment decision.
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