Discount Certificates – An absolute must for conservative equity investors

Discount Certificates – An absolute must for conservative equity investors

A quarter of a century ago, the first discount certificates were issued on the German capital market. Since then, this type of derivative, which is sold at a discount to the current price of the underlying asset, has rightly had a loyal fan base.

The long-term success of discount certificates can be attributed in particular to two factors. On the one hand, they can be used to convert a subjectively assessable investment risk into a defined return opportunity, taking into account personal risk appetite. On the other hand, the good investment results that they can achieve with reduced risk compared to conventional equity investments speak for the “oldies” of the certificate market. The latter has only just been confirmed by an empirical study commissioned by the German Derivatives Association (DDV).

According to this, more than 88 percent of all discount certificates listed on the Stuttgart Stock Exchange on the 70 most popular underlyings generated a positive return in the respective observation period in the past year. In over a third of the cases, the investment result was better than that of the underlying underlying / underlying – with a significantly reduced investment risk. Because the relative discount to the price of the underlying shares or share indices was an average of 14.2 percent on their first trading day in 2019. Translated, this means that the underlyings could have dropped by this percentage on average until the derivatives mature, without resulting in losses for their buyers. Every twelfth of the “discount papers” considered achieved a positive return even in spite of the negative development of the underlying security.

This shows once again, as also by means of various other studies carried out in the past, some of which date back to 1999, that discount certificates can represent an extremely sensible investment alternative, especially for conservative share buyers. So the only downside is the only downside: the cap’s profit limitation of the products. Accordingly, their performance falls behind their development when prices rise sharply, as they were observed in many stocks last year. This is precisely what investors who want an additional risk buffer compared to a traditional equity investment will be able to live well. After all, with over half of the certificates considered, the annualized return was between 5 and 25 percent. With almost every fifth product, it even went beyond this range.

It can be assumed that the relative performance of discount certificates in comparison to the stocks or stock indices to which they refer will be significantly better in 2020 than in 2019. One reason for this assumption is that it is significant on an annual average higher implied volatility of most underlyings. For example, strong fluctuations on the markets or even for individual stocks regularly ensure particularly attractive conditions for discount certificates. And since the outbreak of the Corona crisis, no investor can really complain about a lack of swings in either direction.

You can find the study on discount certificates at:

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