Investing in index certificates – an example
Investors who assume that the underlying – here the XYZ share index – will increase in the future can benefit from this with an index certificate. If the XYZ index is currently listed at 10,000 points and the index certificate has a subscription ratio of 1: 100, then its price is not at 10,000, but at a manageable 100 euros. The subscription ratio of 1: 100 results in a small denomination so that investors can control the value of their investment based on the number of units – and can also use small and medium-sized amounts in a diversified manner.
By purchasing the index certificate, investors are investing in a diversified index that is made up of several individual stocks and thus enables 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 diversification always depends on the number of stocks contained in the index and reduces the dependence of the investment performance on individual values. By diversifying, investors reduce the overall risk of an investment.
No management fee is charged for the exemplary certificate on the XYZ index, so the investor participates directly in a 1: 1 ratio in positive and negative price developments of the index. As a rule, there is only a small difference between the bid and ask price (bid and ask price, also bid-ask spread) of a few cents. If the index is around 10,000 points, investors can buy the index certificate at a price (quotation) of 99.99 – 100.01 euros and sell the index certificate at around 100.01 euros and sell at 99.99 euros. This range of EUR 0.02 corresponds to just two index points.
Attention: For large national and international indices, which are mostly offered without an administrative fee, the bid-ask spreads are extremely small; In the case of less important indices or those with less liquid tradable components (such as small caps or shares from “exotic” countries and regions), the spread between the buy and sell price will generally be higher.
If the XYZ index rises 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 – regardless of costs – a profit of 10 percent on his invested capital.
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, regardless of costs.
Tip: Due to the unlimited term of most index certificates, investors are completely flexible when it comes to holding their position. Many index certificates with an unlimited term are therefore also suitable for regular investments as part of a savings plan.