ELIs are not low risk products. Some of the major risks you should watch out for include:
- ELIs are not principal protected. You may suffer a loss if the prices of the reference asset(s) of an ELI go against your view. In extreme cases, you could lose your entire investment.
- The potential gain on your ELI may be capped at a predetermined level specified by the issuer.
- When you purchase an ELI, you rely on the credit-worthiness of the issuer. In case of default or insolvency of the issuer, you will have to rely on your distributor to take action on your behalf to claim as an unsecured creditor of the issuer regardless of the performance of the reference asset(s).
- ELIs are not secured on any assets or collateral.
- Issuers may only provide limited market making arrangement for their ELIs. However, if you try to terminate an ELI before maturity under the market making arrangement provided by the issuer, you may receive an amount which is substantially less than your original investment amount.
- Investing in an ELI is not the same as investing in the reference asset(s). During the investment period, you have no rights in the reference asset(s). Changes in the market price(s) of such reference asset(s) may not lead to a corresponding change in the market value and/or potential payout of the ELI.
- If an unforeseeable event (Note) occurs in relation to an ELI, the issuer may, at its sole and absolute discretion, adjust the terms of the ELI to account for that event. If no adjustment is able to preserve the economic equivalence of the ELI, the product may be early terminated by paying investors a fair market value as the issuer may determine. Such early termination amount may be substantially less than your original investment amount.
When choosing ELIs, you should also note the followings:
- form your own view on the reference asset(s);
- understand the features and risks of different ELIs;
- note the fees and charges involved. For example, if you take physical delivery of shares on expiry, you will have to pay stamp duty, transaction levy, registration charges and other expenses;
- be prepared to hold the ELIs till maturity;
- understand that in the worst case, you could lose your entire investment;
- choose ELIs that match your view on the reference asset, time horizon and risk tolerance level; and
- refer to the ELIs terms and conditions about actions which can be taken by the issuer in case of an unforeseeable event.
Note: Such unforeseeable event may include, for example, a merger, insolvency, nationalisation, delisting, subdivision or consolidation of the reference asset, or an event which has a diluting or concentrative effect on the value of the reference asset.