This is how investing with a discount works

Discount certificates – that sounds like a bargain. But the discount has its price. We explain to you what the advantages of these more defensive certificates are and where you have to make compromises.

When shopping in the supermarket, the cheapest offers are usually down on the shelf. With financial products, however, you have to take a closer look. Because just because it says “Discount” on a certificate doesn’t have to be worth buying.

So what can this particular type of certificate do? We will show you how “discounters” differ from their more risky certificate colleagues, when they are worthwhile – and when not.

What are discount certificates?

Discount certificates are first of all – like all other certificates – a financial product from the group of Derivatives. This means that you are not investing with you directly in stocks, indices or currencies, for example, but only in a product that is known from these Underlyings is derived. This is where the name comes from: “derivare” is Latin for “to derive”.

Certificates show the development of their base values. How exactly differs from certificate to certificate. Legally they are Bonds, so promise to pay. You do not buy shares in the underlying asset – such as shares – but enter into an agreement with the issuer of the certificate – for example a bank. The problem with this is that certificates are not considered Special fund. If the bank goes bust, your money is gone.

What Discount certificates turns into discount certificates, is their eponymous Discount. This gives you a discount on the underlying asset, for example a share.

  • Does the base value from which the certificate is derived cost, for example 50 Euros, you may just pay with a discount product 45 euros. If the price of the underlying asset falls, you as the certificate holder do not lose as much as 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. This means that your winnings cannot exceed a certain limit. In our example, the cap could be 55 euros lie. If the base value rises 60 euro, you only get that Increase in value from 45 to 55 euros as a profit. In general, the bigger the discount, the deeper the lid sits.

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

How do discount certificates work?

Thanks to their special design, Discount Certificates can be used like a Safety buffer Act. Even if the price of the underlying asset is only moved sideways or easy, you can have another positive return achieve. The reason: When you bought the certificate, you got the certificate cheaper than the value of the underlying asset at the time.

However, they are Price gains for that to the top limited by the cap. If an underlying rises above the cap, you will only benefit from the soaring up to this limit. Anything beyond that is denied to you.

If the price of the underlying is at the end of the certificate term at the level or even above the cap value, the bank pays back the paper at the fixed maximum price, i.e. the cap. If the course is at the end of the term under the cap, you will receive either one, depending on the underlying asset Payment in the amount of the closing price or directly the underlying security is delivered to the custody account.

The latter would be an option for discount certificates that arise shares are based, so here the repayment takes place in the form of the share itself. A payment in the amount of the closing price occurs with certificates Indices, Currencies or Raw materials.

In both cases, the following applies: You only make a loss if the price of the underlying has slipped below the discount price of the certificate at which you originally bought it.

  • For example, a share costs on the stock exchange 50 Euros, you can get a discounted certificate on this stock for 45 euros enter. So that would be compared to buying the stock directly Save 10 percent. This saving is now your safety buffer. If the share falls by no more than 10 percent by the end of the certificate’s term, you suffer no loss.
  • And even if the share price falls more, your loss will be less than if you bought shares directly. For example, if the course is enclosed at the end 39 euros, you must have a loss of 6 euros accept (13.3 percent), but as a shareholder you would have 11 euros Loss made (22 percent).

Is it worth the investment?

Of course, that depends on whether you are speculating correctly. Because certificates are not about anything else: You bet on a certain course. You should therefore only buy discount certificates if you are aware that you can completely lose your money and can cope with it financially.

After all, discount certificates are not as risky as other products from the certificate family. So there is something different with them than with Knock-out certificates no threshold above which the certificate expires completely worthless. And in contrast to Factor Certificates There is no risk of a total loss for prices that have moved sideways over a longer period of time – on the contrary: Discount certificates are particularly profitable then.

They also have discount certificates no lever. This means that you cannot use them to multiply your profit compared to the base value. Conversely, their losses do not grow excessively either.

Nevertheless, the following applies: Discount certificates are not without risk either. Here too is a Total loss possibleif the underlying collapses. And if the issuing bank goes bust, your invested money is part of the bankruptcy estate – and is usually lost. This risk can be reduced if you pay attention to the creditworthiness of the issuer when choosing the certificate.


Related Articles

Back to top button