Investment in index certificates – an example
Investors who assume that the base value – here the XYZ share index – will rise in the future can benefit from this with an index certificate. If the XYZ index is currently at 10,000 points and the index certificate has a subscription ratio of 1:100, its price is not at 10,000, but at a manageable 100 euros. The subscription ratio of 1:100 means that the denominations are small, so that investors can control the equivalent value of their investment via the number of units – and can also use small and medium-sized investments in a diversified manner.
By purchasing the index certificate, investors are investing in a diversified index that is made up of several individual stocks, thus enabling risk diversification. In terms of transaction costs, this is significantly cheaper than various direct investments in a large number of individual shares. The extent of the diversification always depends on the number of stocks contained in the index and reduces the dependency of the investment success on individual stocks. Investors reduce the overall risk of an investment through diversification.
No management fee is charged for the exemplary certificate on the XYZ index, so the investor participates directly in the ratio 1:1 in positive and negative price developments of the index. As a rule, there is only a small difference between the buying and selling price (bid and ask price, also bid-ask spread) of a few cents. If the index is at exactly 10,000 points, investors can buy the index certificate at around EUR 100.01 and sell it at EUR 99.99 if the issuer quotes EUR 99.99 – 100.01. This range of EUR 0.02 corresponds to only two index points.
Caution: In the case of large national and international indices, most of which are offered without a management fee, the bid-ask spreads are extremely small; in the case of less important indices or those with less liquid tradable components (e.g. second-line stocks or stocks from “exotic” countries and regions), the spread between buying and selling prices will generally be larger.
If the XYZ index increases by 10 percent to 11,000 points, the index certificate also increases by 10 percent and is quoted at 110 euros. If the investor then sells the certificate, he realizes a profit of 10 percent on his invested capital – disregarding costs.
If the XYZ index falls by 10 percent to 9,000 points, the index certificate also loses 10 percent and is quoted at 90 euros. If the investor then sells the certificate, he realizes a loss of 10 percent on his invested capital – ignoring costs.
Tip: Due to the unlimited term of most index certificates, investors are completely flexible as far as the holding period of their position is concerned. Many index certificates with an unlimited term are therefore also suitable for regular investments as part of a savings plan.