Factor certificates: high profits thanks to leverage?

With Factor Certificates, you can benefit more than average from certain price developments. However, the risk is correspondingly high. We explain how the products work.

Contrary to what many savers think, you can invest in the stock market with the right products in a relatively relaxed manner and thus build up wealth in the long term. But there are also precisely those products to which the financial markets owe their bad reputation as a gambler’s paradise. Factor certificates belong to this category.

But what exactly are certificates? And what does the factor mean? We’ll show you what this advanced product is all about.

What are factor certificates?

One Factor Certificate is first of all a financial product from the group of Derivatives. This means that with them you are not investing directly in stocks, funds, indices, commodities and the like, but in a product that these so-called Underlyings is only derived.

If the price of the underlying asset changes – for example a share – the value of the certificate also changes – upwards and downwards. You can with Factor Certificates Bet on both rising and falling prices. The difference to other certificates is: A certain factor applies here every day, by which the price development is multiplied.

With this investment you can earn disproportionately on a price increase or decrease. This is also called Leverage. However, you should keep in mind that losses are also multiplied by the same factor.

How do factor certificates work?

Factor certificates belong to the so-called Leverage products or Leverage papers. That is, they enable disproportionate profits versus the profits that would be possible if you invested directly in stocks, for example. The reason for this is the eponymous factorwhich can range from 2 to about 15.

  • Let’s assume you buy a factor certificate with a factor of 4 on the German leading index Dax. Because you assume that the Dax will still gain, you decide on one Long variantwhich means nothing else than that you are using the factor certificate bet on a rising course.
  • If that happens and the Dax rises by 1 percent, for example, your certificate would increase by 4 percent because of the factor 4. On the other hand, if the Dax falls by 1 percent, the value of your certificate also falls by 4 percent.
  • It would be the other way around with a Short variant of the Factor Certificate. Because with it bet on falling prices. So if the Dax falls again, for example by 1 percent, you can be happy, because that’s exactly what you expected – your certificate will increase in value by 4 percent. On the other hand, if the Dax rises, the value of your certificate would fall by 4 percent.

For the long version of a factor certificate, the ideal scenario would be that the base value (in our example the Dax) rises continuously from day to day. Similar to the compound interest effect the value of the certificate increases exponentially. It’s called Base effect.

So if the Dax is at 12,000 points and rises by 1 percent in each of the following five days, it is at 12,612 points. A factor certificate with a factor of 4, on the other hand, rises to 14,599.8 points – a gain of 21.67 percent. Four times 5.1 percent, on the other hand, would have corresponded to only 20.4 percent.

With a short version of the Factor Certificate, you also benefit from the base effect when prices are constantly falling. However, this one has another one Advantage if the price rises contrary to expectations: The leveraged losses then relate to a lower price level and are therefore lower.

But be careful: A total loss is still possible – even if the price of the underlying only moves “sideways”, i.e. small swings up and down alternate over a longer period of time. Then the so-called negative sideways return – not good for you as an investor.

  • Let’s say you own one Long certificate with a factor of 8whose base value increases from 100 to 110 euros. The value of the factor certificate then increases from 100 to 180 euros – an increase of 80 percent, while the base value only increases by 10 percent.
  • If the base value falls back from 110 euros to 100 euros the next day, that is a minus of 9.1 percent for him. The eightfold minus of the factor certificate is 72.8 percent. 180 euros minus 72.8 percent results in 49 euros – and thus far less than the starting value of 100 euros the day before.
  • Hold the Factor Certificate for 15 days with this sideways trend, it loses around 99 percent of its value. In order to compensate for the losses again, the price would have to increase more strongly every day. For example, with a view to days three and four, the price of the underlying would not have to increase by 80 percent, but by around 268 percent in order to reach the level of day two again.

It is therefore especially at high levers mathematically almost impossible to endure losses. As a rule of thumb, the higher the leverage, the more likely the money will be lost. You should therefore never hold factor certificates for more than a day.

Good to know: Factor certificates have a so-called adjustment threshold – also known as a reset barrier. It is intended to prevent total loss by preventing the value of the certificate from falling below a specified limit in the event of sharp price drops. However, this is usually only shortly before the total loss – so in practice you have not gained much with it.

What are the pros and cons?

The chance of fast and high profits allows many investors to resort to factor certificates. But there are also many risks. An overview.

Advantages of factor certificates:

  • Disproportionate profits if you have speculated correctly
  • Base effect increases your winnings exponentially while limiting your losses
  • Unlike Knock-out certificates the leverage of factor certificates remains constant
  • There is no knock-out threshold that would lead to a total loss if it is exceeded or not reached

Disadvantages of factor certificates:

  • Disproportionate losses if you speculated incorrectly
  • Losses even when prices move sideways (see above)
  • Total loss possible if the publisher goes bankrupt or you keep the certificate for too long
  • Adjustment threshold does not offer absolute protection against total loss – rather a “deceptive security” (see above)

Who are factor certificates for?

Because of their high risks, you should only invest in factor certificates if you are aware that you primarily gamble instead of investing money prudently. Therefore, you should definitely have the money for it – because it can be gone quickly. On the other hand, those who aim to build up a fortune in the long term should resort to other financial products.

So-called index funds, or in short: ETFs (“Exchange Traded Funds”). These are special funds in which a computer algorithm tracks an index such as the Dax.

An ETF is, so to speak, a kind of basket of many different stocks. Thereby reduce your risk and can invest in the entire global economy with comparatively little money.


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