There is a wide range of securities on the market. The different financial products can be used to hedge your securities portfolio or can be specifically selected in order to achieve the greatest possible return. The market holds different products ready for this. In addition to funds and ETFs, there is also the opportunity to invest in certificates. But what are and how certificates work exactly?
What is a certificate?
The functionality of certificates is actually quite simply explained: From a purely legal point of view, a certificate is a bearer bond. With a certificate, you therefore have no ownership or shareholder right but the right to a certain amount. The value depends on the development of a so-called underlying. This can be for example:
- Raw materials , for example precious metals such as gold, silver or palladium, energy raw materials such as oil and gas or industrial metals such as aluminum
- Currencies , such as the euro and the US dollar
How do certificates work compared to alternative products? In contrast to other securities, the price of a certificate does not result from supply and demand. Instead, it is determined by the price movement of the respective underlying. Certificates can differ in terms of the following criteria:
- With and without fixed term
- In euros or in foreign currency
- Notated in units or percent
- With or without the right of termination of the issuer
Which factors determine the issue price?
In addition to the performance of the underlying, other factors play a decisive role in the price development of the certificate. This includes:
- Value of derivative components
- Margin that the respective issuer can set itself
- management fees
What factors determine the value of a certificate during its lifetime?
Here, too, the development of the underlying is crucial. However, there are other aspects that affect the value of a certificate during its lifetime:
- Development of interest rates
- Possible dividends
What types of certificates are there?
Different types of certificates are available on the market. These include, for example:
- Index Certificates: You do not invest in a single share but in an index, such as bond indices such as the REXP or stock indices such as the German DAX.
- Basket certificates: These relate to several individual stocks or to indices that are grouped together in a so-called basket. Its value results from the individual values and their respective weighting. The composition of the basket can either be static throughout its lifetime or adjusted if necessary.
- Single value certificates : refer to a single value, such as a commodity or a share.
How does the purchase of certificates work?
You can buy certificates both on the stock exchange and from a issuing bank. Each certificate is provided with a unique securities identification number (WKN or ISIN), which you must specify when trading. As an investor, you also have the opportunity to invest regularly in a certificate savings plan.
Bear in mind: Certificates are bearer bonds. In the event of a bankruptcy of the issuer, you can not claim against it. Your certificate is worthless. Therefore, think carefully about the investment in certificates and only opt for this financial product, if you are familiar with the functioning of certificates. Be sure to choose a trusted issuer to minimize the risk of loss.