Certificates as an Investment? This is How it Works

For the first time, their interest in securities ranks first when it comes to the question of which financial investment is most suitable in the low-interest phase. In addition to shares and bonds, this also includes certificates. Certificates? That’s right. What exactly this form of security is, how you can use it and what things to look out for, you can find out here.

The most important facts in brief:

  • Certificates are bearer bonds issued by a bank (the “issuer”).
  • There are many different certificates – with different risk/reward profiles and for individual market expectations.
  • The features and the term are clearly defined from the outset.
  • You can use them, for example, to bet on the price performance of shares or indices, but you can also receive attractive interest payments regardless of developments on the capital markets.
  • To make the best possible use of the opportunities offered by this form of investment, you should seek good advice beforehand.

What are certificates?

In the range of securities, certificates are a relatively young product. The first certificate ever traded was issued in the early 1990s. While certificates were initially popular primarily with institutional investors, they soon became the focus of private investors as well.

Certificates are structured financial products that are usually issued by a bank and are legally classified as bearer bonds. Unlike shares, they do not represent a share in the issuing bank. For investors, investing in a certificate rather means that they lend money to the issuer of the bond by purchasing it. The creditworthiness of the issuing bank, the issuer, is thus an important factor in the selection of a certificate.

Certificates can be tailored for a variety of possible scenarios. They can play to their strengths in different market developments. Depending on the design, these can be rising, sideways trending (stagnating) or falling prices.

Which certificates are available?

There are numerous different types of certificates: The range extends from products for security-oriented investors with fixed interest payments or capital protection* components to more offensive products that are aimed more at investors with an affinity for equities and offer significantly higher potential returns. As with any investment, however, the risk that the investor is willing to take also plays an important role and must be taken into account accordingly when choosing the type of certificate.

The best known certificates are:

  • Reverse convertibles
  • Credit-linked bonds
  • Bonus certificates
  • Express certificates
  • Step-up bonds

Reverse Convertible Bonds

This type of certificate allows investors to earn a fixed interest income during the specified term. By purchasing a reverse convertible, they assume that the price of the underlying security (usually a stock or a stock index) will be at or above a specified price threshold, known as the strike price, at maturity.

Credit-linked bonds

Credit-linked bonds are aimed at investors who wish to achieve a fixed interest income for the respective interest period, irrespective of the stock market, and who do not expect a so-called credit event with the corresponding reference debtor during the term of the credit-linked bonds.

Bonus certificates

These certificates have a fixed term. Even if the price of the underlying asset falls somewhat, there are earnings opportunities. They offer both the chance of a bonus payment and unlimited participation in the rising price performance of the underlying (usually a share or an index).

Express certificates

This variant is also linked to the performance of an underlying (usually a share or a share index) and has a fixed term, usually several years. Under certain conditions, however, this is terminated early and the nominal amount is repaid before the original maturity date – hence the name “express”. Express certificates offer the possibility of an interest payment which, depending on the variant, can be fixed or also dependent on the price performance of the underlying.

Step-up bonds

Step-up bonds offer a fixed, increasing interest income during the term. At maturity, they are redeemed at the nominal amount.

Leave a Comment