Certificates as an investment: an overview of risks and opportunities

“… The buyers did not understand what you bought.
The sellers do not understand what they have sold.
The issuers have realized it is not in the majority, what they have designed. The inspectorates and auditors have understood nothing at all …. “

Certificates are currently the absolute favorite and fashion products in the investment business of banks. Despite Lehman default and the current times of uncertain financial situation of the certificates booming market. Reason enough to shed light on this highly complicated art product. Here the attempt of a simple explanation:

What is a certificate and how does it work?
Certificates are artifacts, they are of the so-called “issuers” So the publishers of certificates, usually banks, “designed”. They may be designed for each investor type, from extremely security conscious and take risks.

Certificates are a special kind of a security and work as follows:
Investors acquire by paying a certain amount to the issuer to have a document in the form of a certificate. This has a certain maturity and guarantees in many cases a refund. The certificate in turn is related to so-called underlying securities. Underlying are e.g. Equities, commodities, or combination of values such as equity indices or fixed-income securities.

Investors buy, then, simply put, a voucher that they can benefit from the performance of the underlying asset, without the need to purchase the stock, commodity or equivalent document directly.

“In principle, most certificates are nothing more than bets. You bet with the bank for, say, a stock or commodities, and stock market indices – so-called underlying securities – are developing in a certain way “said the Munich-based financial adviser Svea cuddle. … And depending on how risk-averse one, you can hedge that bet … ”

This coverage is in reality often called a capital guarantee. This means that the issuer, ie the issuing bank to repay the invested money (not the return!) Guaranteed. This is important to know that the seller and the issuer does not have to be absolutely identical, but often the main bank certificates of another, unknown, sold under certain circumstances, international issuers. The issued capital guarantee – if any-the issuer, not the well-known and trusted bank.

Market situation in Germany (uaQuelle: Tilp, Day 6 of the banking and capital market law):
Germany is the “world leader” in certificates. The cause is the view of many experts in the attractive incentives for the seller (the bank) in the form of commissions. In other states, the certificate is subject to strict trade restrictions and government controls.

At the end of August 2008 (before the Lehman bankruptcy on 15.09.08) in Germany 370 000 different products were certificates in the trade. Per trading day were only added in July 2008, around 2,600 new products. Only 12% of bank customers have actively asked for certificates and less than half the retail investors to the group of self-decision. This means that these investors were not making an independent decision to purchase these certificates, but the bank as part of an asset management or similar carried out for the customer’s decision and the purchase of the certificate. According to some experts understand about 90% of the certificate holder does not really, as they have invested their money.

Disadvantages and risks of certificates:
In Germany, for certificates so far not even an approval in principle so everyone can get certificates on the market and the investor does not enjoy any bankruptcy protection.

The hook of allowances is in fact, that the guarantee is only as good as the creditworthiness of the issuer, ie the bank that issues the certificate. If the bank goes bankrupt – as in the case of Lehman Brothers – is the warranty worthless and lost the money.

Moreover, unlike fund certificates or deposits with a bank not subject to the deposit insurance fund of the Federal Association of German Banks. The Deposit Protection Fund of German Banks, the capital of each individual customer at the private banks at the rate of 30% of the relevant liable capital of each bank at the time of the last published financial statements are fully gesichert.Zertifikate are not protected.

Major target of critics, however, is opaque cost of allowances. fall for certificates, as with other securities, at different costs that are borne by investors. The investor has to recognize with certificates – unlike shares – not the possibility of surcharges and other costs. He gets communicated to a final price, the price increases are for the investor invisible and sometimes horrendous. This is called opaque pricing. “The fairness of prices depends solely on the fairness of agency” (quoted in Tilp, aao).

Finally, provide certificates to the sellers the opportunity to handle investor protection rules. These are investments that are subject to the normal distribution stringent investor protection rules, because they used highly risky or even “toxic” (poisonous), are as basic values.

I have purchased certificates – now what?
The owner of certificates of advice is wrong or even feel betrayed, are possible for incorrect claims against the selling bank or financial advisers etc..

The attempt to assert such claims is by no means hopeless. If the claims are entitled to is often already in voluntary sector together to work out a solution with the bank. However, such claims are subject to tight limitation provisions. The potentially aggrieved investor is well advised not to wait for the motto “first times” to persist. Could then easily enforceable claims may already be in the worst case time-barred.

It is more advantageous to have initial cost in such a case the matter by a specialist in banking and capital markets lawyer. This examination of the certificate owner has the ability to assess opportunities and risks of reversal of a certificate purchase carefully.