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Certificates (Zertifikate) are structured securities, issued by banks and offering various investment strategies.
In all situations, speaking about certificates and other derivative financial instruments, we strongly recommend consulting our experts.
A certificate (Zertifikat) is a security, belonging to the group of structured financial products. Certificates are issued by banks, thus constituting a bearer bond of the bank. Certificates are sold mainly to individual investors, thus being a classical retail-product.
Certificates allow individual investors to employ various complicated investment strategies as well as invest in raw material assets.
Certificates are traded mainly over the counter.
This financial instrument was invented in Germany. The first certificate was issued by Dresdner Bank in June 1990 (DAX-Zertifikat).
It should be noted once again, that a certificate is in fact a bank general is issued as bearer bonds, and in case of the issuing bank's insolvency/bankruptcy the investor risks losing their money (the certificates of Lehman Brothers bank, which was declared bankrupt in 2008, are a negative example of this).
Neither the state nor a private bank union guarantees certificate investments return. Therefore, purchasing them requires careful consideration of the issuer's reliability and solvency.
Certificates offer investors various investment opportunities, the determining factor being the right structure and/or underlying asset. Certificates allow reproducing the structure of various underlying assets, such as: shares, share and bond indices, currencies, raw materials (gold, silver, oil etc.) and so on. Therefore, certificate profitability depends on its underlying asset cost fluctuation.
In the example given below we are going to present a short review of certain certificate types. Each individual example requires checking all terms and clauses of the contract, as certificate structures of various issuers may differ greatly. ICFB is always ready to advise you on any issues related to investing in certificates.
Index-Zertifikat: reproduces its underlying index fluctuation. This allows minor investors to finance relevant countries' markets. The underlying component may be represented by, for example, share (DAX, Dow Jones EURO STOXX 50 etc.) and bond (REXX etc.) indices, raw material or interest rate indices and so on. The advantage of this certificate type is that investors can profit from the index growth without having to invest in all the assets making up the index aforesaid. This certificate type is more useful for investment diversification.
Exchange Traded Funds (ETFs) are a similar financial instrument. These are exchange traded investment funds with passive management, investing directly in instruments and repeating the index structure (assets are separated from the fund and returned to the investors in case of its bankruptcy). ETFs' advantages are described in the corresponding section.
Bonus-Zertifikat aims at securing protection from the underlying asset rate fall (as a rule, underlying assets are made up of shares). If the underlying asset rate does not reach a certain bottom threshold value (set in advance at the moment of entering into the contract) within the certificate validity period, the investor receives a predetermined bonus.
The certificate emission cost equals to the basis (share) cost at that moment (indices may also be used as bases). It has a bottom threshold value, which is lower than the actual price, and a bonus value, which is higher than the actual rate.
Investor's advantage: unlimited interest in profit if the basis is growing and at the same time receiving a bonus if the basis has been flat-traded and has never fallen below the bottom threshold value. If the underlying asset rate falls below the fixed bottom threshold value, the certificate becomes a common share and at the end of its circulation term the investor receives a payment, based on the underlying asset actual rate at that moment.
Risk: At/below Protect-Level 100 % loss-participation. Cash settlement or delivery of the shares at maturity.
Discount-Zertifikate are also popular to gain yield. Their emission cost is lower than the underlying asset rate (as a rule, underlying assets are made up of shares) at that moment (i.e. they are discounted). This right limits the investor's interest in profit if the underlying asset rate goes up (by setting a top threshold value – Сар). Thus, the certificate buyer's behaviour is similar to selling an option to relinquish any profit above the Cap level. While selling the option aforesaid, the buyer receives a bonus, which is immediately included in the share price. This bonus corresponds to the discount, given to the investor buying a share or index.
Some investors purchase a share, at the same time selling a Call with the strike at the Cap (regular covered Calls).
This kind of certificate provides an interesting opportunity for investors, who are not sure of further share or index rate fluctuation, though do not expect sharp upward or downward movement. Below the strike the underlying asset will be delivered – the lower the share price the higher the loss risk for the certificate buyer.
Garantie-Zertifikate offer certain guarantees to those investors whose main choice is security. Investors gets limited gains or a participation rate from the underlying asset rate growth, at the same time being guaranteed the investment return in case of the underlying asset rate fall (both shares and indices may be used as the basis). The certificate has a certain security level (risk prevention level). In its simplest version, this level equals the actual underlying asset rate.
Disadvantages: General no dividends for investors; the security level as a rule does not reach the actual underlying asset rate (e.g. the security level amounts to 95% of the emission cost); underlying asset rate growth coefficient is less than 1. The participation rate depends on the construction and for example can be 70 % of the capital gain.
There are also a great number of other certificates, such as: Express-Zertifikat, Sprint-Zertifikat, Outperformance-Zertifikat, Tracker Zertifikat, Rainbow Zertifikat, Quanto Zertifikat, Outperformance Plus Zertifikat, Discount Plus Zertifikat, Basket Zertifikat, Airbag Zertifikat, Twin-Win-Zertifikate (Butterfly Zertifikat) and others.
We are always ready to provide you with more information about various certificates and their diverse structures, as well as advice on all issues, related to them. We recommend you allways to ask for independent consulting.
