Education

How to get started investing in certificates

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Vontobel Markets
10/08/20227 min read
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Why should a private investor embark on investing in certificates? Certificates with leverage make it possible for both private and professional investors to make money in the market, for example with short-term investments, regardless of whether the overall trend goes up or down, ie whether we are in a Bull or a Bear market.

For investors who do not have the appetite to invest in leveraged products with higher risk, Vontobel's tracker certificates offer the opportunity to invest in new trends or niche products in a simple and clear way.

In theory, private investors could trade in the futures markets themselves and, for example, buy options to hedge risks in the investments they have made in equities and thus try to create their own hedging. However, due to the very high cost and difficulty of trading derivative financial products in the capital market, it is not a method that is immediately available to private investors without in-depth knowledge of the financial market.

As with ETFs or index funds, it can be costly and cumbersome for a private investor to make investments that provide the same spread of risks at a price that can compete with the function that a certificate has.

In this way, Vontobel offers in its certificates a simple and accessible product with relatively low transaction costs. For the private or professional investor, it is no harder to make a trade with a certificate than it is to buy into common financial instruments, such as. shares of a company or investment certificates in an ETF, an investment fund, index-linked companies, bonds or other financial products.

On the other hand, it can be difficult to find Vontobel's certificates with brokers in Denmark. It requires that you use one of the brokers in Denmark that so far has the product on its shelves, and it is typically not your own bank, but rather another broker or platform. In Denmark, you will find Vontobel's certificates on the platform Nordnet, at Danske bank and at Nordea.

So how do you get started claiming a daycare investment?

  • First of all, is it important to find out what you as an investor are interested in? what is your overall investment strategy and what role should certificates play in your portfolio? Which product class are you interested in wondering about? Is it stocks, bonds, commodities, currencies, interest rates or something completely different?
  • Next, it is important to consider how to choose the underlying asset and relate it to the expectations that are for that particular set of values ​​and that you then identify what the market's expectations are for the return on that particular asset. For example, if you have chosen that shares are your favorite investment, how do you think that the share or the index that includes that share will develop?
  • If you as an investor decide to buy shares, such as is part of a larger overall index, such as the Danish C25 Index, it is important to be aware of what expectations you have for the return on that investment. Once you have clarified your own expectations and predictions, it is a good idea to set those expectations up against the results of the asset you want to invest in compared to your own risk appetite to become aware of an appropriate balance between your best dream scenarios and your willingness to to lose on your investment. If you are very confident in your case in terms of which way what you invest in should develop, you can consider using leveraged products, such as Vontobels Bull and Bear certificates.
  • If, on the other hand, you have a low risk tolerance, the best solution may be to buy a certificate that ensures that you always know what you can lose or have a longer time horizon. It can e.g. be done by selecting a tracker certificate.
  • Once you as an investor have found what you want to invest in, taking into account your risk profile, it is important to find the financial product that suits your strategy.
  • There are many elements that come into play in that choice, depending on the elements of the many different certificates. As an investor, you can learn more about the various elements here.
  • Here you can read all about the different certificates, e.g. when they have entered the market, how they have developed, what the volatility is, the interest rates and what underlying assets form the basis of the certificate.
  • It is important to take the initial phase and research seriously and there are many resources online that can help create clarity and overview of how to lay out your strategy and how to combine different financial products and spread your risk as a private investor.
     

For the private investor who has thoroughly done his research, there may be benefits to investing in certificates. These are:

Transparency: Both the purchase price and the selling price of the certificate and of the underlying asset from which the price of the certificate is triggered are known at all times.

Liquidity: As an investor, you can buy or sell at any time, because Vontobel, as the market maker, sets a buy and sell price to ensure that you can trade your certificate.

Availability: The price of the individual certificates is typically affordable to even for the smaller private investor. At the same time, it is optional how many certificates you want to buy.

Low cost: Because the underlying asset is fixed and only in special cases is changed, most certificates are ”passive investments”, which typically means lower ongoing administration fees. Vontobel earns its money in the spread between the purchase price and the sale price.

As a private investor, you must in turn be aware that you are buying the certificate from Vontobel, which means that the money is lost if Vontobel goes bankrupt. This is called ”issuer risk”. Certificates are not subject to any deposit protection. Here you can read about Vontobel.

Certificates or ETFs - What is the difference and should you choose?

There are thousands of different financial products available at banks, brokers and on other platforms where private investors can trade. An investment certificate is just one of them - and often it can be difficult to understand what the different products can and do and what to keep an eye on before dipping your toes into a sea of ​​opportunities that have become more and more complex for the ordinary private investor.

In recent years, ETFs, Exchange Traded Funds or Index Funds in particular have found their way into the portfolios of private investors in Denmark.

ETFs are considered in some circles as big sisters to the certificate. This is because there are many similarities between the two products, although they are also structurally completely different.

Vontobel's certificates are relatively simple products with relatively low transaction costs. Once the price of the certificate has been paid, there is no obligation to make additional payments because as a bearer security (similar to a bond) the potential loss of the investor will be limited to the capital invested, i.e. the purchase price paid, including any transactions cost, such as broker fees.

Another advantage of the certificates is that it they are listed securities that are traded on an ongoing basis and where Vontobel, as so-called “market maker”, is continuously quoting a purchase and sale price, which makes the trade in certificates transparent. The fact that trading in certificates takes place on an exchange and is subject to exchange rules can provide additional security for the private investor compared to other trading products traded only off-exchange.

As a private investor, you may be able to buy certificates through an investment adviser at your bank, but it is easier to buy them from a provider through an online platform. At present, in Denmark, for example, you can buy them through Nordnet.

Checklist before you start investing

Regardless of which financial product you as a private investor are considering investing in, there are a number of questions that you need clear answers to, namely: What is the product's underlying asset? What conditions are attached to the return? Are the risks clearly specified and are there appropriate indicators for risks? What is the cost of the financial product I am buying? As an investor, can I choose to sell the product at any time without any problems? As an investor, can I track the current value of the product at any time?

As for certificates, the answer in all cases should be quite clear. Certificates are therefore more transparent than many other established financial products. But to understand opportunities and risks, it can still be helpful to look at what other products are available in the financial supermarket, e.g. the popular ETFs.

Certificates vs. Index Funds (ETFs)

Index funds that are traded on the stock exchanges - the so-called ETFs - have become furiously popular with private investors, also in Denmark, in recent years. As a financial product, they are easy to understand, with stocks in often well-known companies as the underlying asset. At the same time, they are often cheap with a transparent fee structure and last but not least, the ETF is a product that gives the private investor some diversification, or put another way: There is less risk in not putting all your savings in the same company, ETFs are composed of a basket of e.g. shares and thus comparable to certificates that they reflect the performance of certain underlying assets.

Thus, both ETFs and Certificates, or Exchange Traded Notes (ETNs) are both designed to track an underlying asset.

When you invest in an ETF, you are investing in a fund that typically owns the asset it tracks and has no other obligations. Accordingly, you have no ”issuer risk”. By contrast, a certificate is like a bond. It is an unsecured debt product issued by an institution. Unsecured means that there is an issuer risk on the issuer, in this case Vontobel. If Vontobel goes bankrupt, the investor may lose the money he or she has invested in the certificate. For this reason, it is important for the private investor to look at the credit rating of the issuer or guarantor before investing in a certificate. See Vontobel's credit rating here.

ETFs and certificates are also similar in their cost structure because both products are typically ”passive investments”, which means lower costs for the individual investor.

In practice, ETFs and certificates are very similar. Both are designed to track an underlying asset and both often have lower cost percentages than actively managed mutual funds, and both trade on stock exchanges just like stocks.

ETFs are probably exponentially larger in total volume than certificates, just as stocks versus bonds get stocks more attention from private investors because they are immediately easier to understand. However, there are also benefits, not least in terms of the ability to leverage your investment and also in the ability to invest in more niche areas with certificates, provided of course that you have done the research and gained an appropriate level of understanding to take a decision.

You should still remember that the value of a certificate (similar to an ETF) can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset moves in the opposite direction of your market expectation.

Product and possible financing costs in certificates with leverage reduce the value of the certificate over time. In addition, due to the leverage effect, there is an increased risk of loss (risk of total loss) with leverage products, e.g. Bull & Bear Certificates, Warrants and Mini Futures.

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future results.