According to the Securities and Exchange Commission (SEC), an equity-linked certificate of deposit (CD) is an “FDIC-insured certificate of deposit that ties the rate of return to the performance of a stock index such as the S&P 500 Composite Stock Price Index.” Conditions vary by investment, but an equity-linked generally has a term of five years, and a rate of return calculated on the date of maturity dependent on the terms of the contract. “Therefore,” the SEC cautions, “there is no guarantee that any payment in excess of the guaranteed payment will be paid.”
Like any investment products, equity-linked CDs have their share of upsides and downsides. Here are some of the risks you should consider before investing in equity-linked CDs.
“Liquidity Risk.” the SEC notes that “Investors typically will have limited opportunities, if any to redeem their equity-linked CDs prior to maturity.” There’s no guarantee of a secondary market, and many CDs don’t allow investors to make early withdrawals without the approval of the issuing institution. Early withdrawals, furthermore, will likely incur penalties, as well as the loss of interest you would earn in a normal CD.