10 things to watch out for when... Buying equity linked instruments

What are they?: Equity linked instruments (ELIs) are a new investment option listed on the Hong Kong stock exchange. They debuted last month but were previously available on the over-the-counter market. They are traded using the AMS/3 system in the same way as stocks and are subject to Hong Kong Exchanges and Clearing rules.

What is the point?: ELIs are a structured product marketed by banks and financial institutions to retail and institutional investors who want to earn more than they would on an ordinary bank deposit and are prepared to take on some equity related risks.

How does it work?: By buying an ELI you are indirectly writing an option on an underlying stock - the right to buy or sell a parcel of shares at a predetermined price on or before a set date in the future. If the market moves as you predicted, you earn a fixed return derived mainly from the premium received on writing the option. If the market moves the other way, you may lose some or all of your money or receive shares worth less than your initial investment.

Bull: There are three options for ELIs listed on the exchange. With a bull option, you take a positive view on the underlying stock. If on expiry the underlying stock is at or above the strike price, you receive a cash payment at the total value of the ELI, plus interest. If the stock closes below the strike price, you will receive a predetermined quantity of shares or the cash equivalent based on the closing price of the stock.

Bear: This option is for those bearish about the underlying stock and expect it to fall over the life of the product.

Range: A range ELI is for those who have a neutral view on an underlying stock, with three payment options determined on expiry depending on whether the stock closes within the predicted range, above, or below.