How do they work and what is a leverage product?

Certificates promise quick money, but investors should be careful. Because the great opportunities are offset by high risks. We explain the advantages and disadvantages of these financial products.

Certificates have had a bad image since the financial crisis in 2008. They are considered speculative and difficult to see through for investors. Anyone who wants to invest in them should therefore understand exactly what these special financial products can be used for – and what is at stake.

We show how certificates work exactly, what advantages and disadvantages they have and what difference it makes whether you invest in a bonus, discount, index or guarantee certificate.

What is a certificate?

Certificates are special financial products from the group of Derivatives. This means that you are not investing directly in certain securities, for example, but in a product that is only based on these securities. Certificates not only show the development of stocks, but also of other asset classes such as indices, bonds, commodities or currencies. These underlying investments are also called Underlyings.

From a legal point of view, certificates are Bonds, so promise to pay. Because you do not buy shares with a certificate, you enter into an agreement with the issuer of the certificate – for example a bank. You could also say: a bet on the course of the course. It’s risky. Because certificates are – unlike funds – not as a special fund. If the publisher goes bust, your money is lost. This is also called Issuer risk.

What are the advantages and disadvantages of certificates?

Certificates have two main advantages: First, you can use them invest in asset classes that are otherwise not as easily accessible. With certificates you can invest your money in raw materials or precious metals. For example, it can be more convenient if you buy a certificate for the gold price and benefit from its development than if you put a real gold bar in the safe.

In addition, private investors can also use certificates to to secure your deposit. Because with them you can also bet on falling prices. So if you generally pursue a long-term investment strategy, for example, in which you have to sit out crises over and over again for years, a certificate could ensure that the losses are compensated somewhat in these times of crisis.

The big disadvantage of certificates for you as an investor is that riskyou go into it. As mentioned earlier, you can have a Total loss suffer if the issuer of the certificate is insolvent and can no longer meet his agreed payment obligations.

But even if the bank doesn’t go bust, you can lose a lot of money with certificates. This is especially true if you are in what is called Leverage Certificates invest (see below). Because if things don’t go as planned this multiplies your loss.

Certificates also have disadvantages for companies. Unlike when buying shares, the money you put in certificates does not go to the stock corporation. So she cannot use it for investments, for example.

What types of certificates are there?

Certificates come in many different designs. The best known are index, discount, bonus and guarantee certificates. A distinction is also made between “simple” certificates and those with leverage.

Leverage Certificates

Certificates are tempting for many investors mainly because one is familiar with them Multiply profits can. For this you have to be in Leverage Certificates invest. This is also called Leverage products or Knock-out certificates.

With a leverage of ten, for example, your profit increases tenfold, with a leverage of three by three times. The prerequisite for this, however, is that you are right with your bet on the price development. If you have speculated incorrectly, your loss will be multiplied accordingly.

You can speculate in both directions – both on rising and falling prices. If you bet on rising prices, that’s called Long positionIf you bet on falling prices, you acquire a so-called Short position. In the stock exchange talk there is therefore also talk of “shorting” or “going long”.

Index Certificates

Index certificates usually form one Stock index such as the Dax in a ratio of one to one. So you have no leverage. The index certificate is therefore about as risky as the index it represents. However, there is also the issuer risk (see above).

Usually, investors start with an index certificate rising priceswithout being tied to a fixed term. Index certificates work in a similar way to a ETF (“Exchange Traded Fund”), which also tracks a specific index. Investors often use index certificates in the form of savings plans for retirement provision. However, compared to ETFs, certificates are usually with high costs which are not always easy to recognize, even for experienced investors.

One advantage of index certificates, on the other hand, is that they are easier for the issuer to construct, which means that the range is broader – and you can invest more in emerging niche and growth markets, for example.

Discount certificate

Discount certificates are called that because they give you a Discount to get. If the base value from which the certificate is derived costs 80 euros, for example, you may only pay 60 euros with a discount product. If the price of the underlying asset falls, As a certificate holder you do not lose so muchas if you had invested directly in the underlying asset. But you buy this advantage with one Disadvantage with possible profits.

Because discount certificates are through a so-called Cap capped. It just means that your winnings cannot exceed a certain limit. In our example, the cap could be 90 euros. If the base value rises to 100 euros, you will only receive the increase in value from 80 to 90 euros as a profit. The general rule: The bigger the discount, the deeper the lid sits.

However, there is only such a limit upwards, not downwards. That means: You always make losses in full – up to a total loss.

Bonus certificate

Here, too, the name says it all. Because with bonus certificates you have them Chance of additional money. The bank pays you either one at the end of the term predetermined amount or the amount by which the underlying asset has increased in value.

However, this system, on which the certificate is based, may be used for the entire term do not go below a certain rate. If that happens, the agreed bonus amount will not be available – and you have also lost money. Because you are not allowed to sell the bonus certificateif you think the lower limit may be reached soon.

If, on the other hand, the bet wins – if the price of the underlying asset does not fall below the specified limit, you either make it Profit equal to the increase in the price of the underlying or have at least partially hedged against a price slump because you now get the bonus

Guarantee certificate

Guarantee certificates are also called Protection Certificatesbecause the bank guarantees you will pay a certain price at the end of the term – regardless of whether the actual price of the underlying is lower by then. For example, if you have agreed that the bank will repay you 90 of the 100 euros you have invested, it must do so even if the base value has fallen to 80 euros. So cap your loss.

But you may have to accept that you only partially benefit from a significant rise in the price of the underlying. However, that depends on how your guarantee certificate is designed. There are differences from product to product.

For whom are certificates worthwhile?

In general, certificates are complicated financial products and therefore not suitable for beginners. You should only invest once you have fully understood how the certificate works. You should also be aware of the costs. However, they are not always recognizable at first glance.

In addition, you should be aware of that you always speculate with certificates. The bet can pay off – then you benefit from advantages such as being able to protect yourself against losses, or a multiple of profit if you have decided on a leverage product. If you lose your bet or the bank goes bust, you run the risk of that your money is completely gone.

Otherwise, the same principle applies as for other financial investments: Do not invest without a strategy. You can only find the cheapest way to get there if you know your exact destination.


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