Investment certificates represent a very wide-ranging family of innovative and particularly efficient financial products. Since they were first introduced in Italy ten years ago, certificates have developed significantly and constitute a growing percentage of investor assets.
Owing to their flexibility in adapting to new underlyings and incorporating new investment strategies, they are ideal instruments for optimising portfolios.
Certificates are listed on the SeDeX market of the stock exchange and are easily accessible to all investors. Diversification instruments with limited capital
For investors who manage their savings autonomously, the investment certificate market provides a variety of financial solutions conceived for all investment needs.
Certificates offer the possibility to invest, at a limited cost, in otherwise not directly accessible underlyings, such as emerging country indices, raw materials and currencies. The range of structures available on the market, in terms of different risk/return profiles, allows investors to find the instrument most suited to their risk propensity at the prevailing market conditions.
Ease of access for optimisation of portfolios
Investment Certificates, as with all instruments listed on the SeDeX, are easily tradable during market trading hours. Whatever the chosen structure and reference underlying, all certificates can be purchased and sold at any time, in the same easy manner as shares are traded.
Since the minimum tradable amount is low, investors are able to carry out investments even for small sums on niche structures and underlyings. Thus with a limited amount of capital it is possible, for example, to gain exposure to an entire stock index.
What are they?
The Certificates are financial derivatives that offer the possibility to invest in any market of interest and incorporate structures ranging from the most simple passive replication of the trend in the underlying asset to more complex structures combining different components in order to implement certain investment strategies. The number of investment products and variety of available structures covered by this definition are now greater than ever.
From a legal standpoint, since they are negotiable bearer securities, certificates are classed as securitised financial instruments.
Quanto: “quanto” is used to define those certificates whose underlying is expressed in a currency other than Euro, but which are structured in such a way as to avoid being subject to fluctuations in the exchange rate between the currency of the underlying and the Euro. These certificates relate only to the performance of the underlying in the reference market.
Autocallable: this is used to define investment certificates that provide for possible early repayment of the nominal value plus a premium, upon the occurrence of a certain condition (normally the underlying exceeding a specific level).
Cap: this represents a limitation on the certificate’s participation in the upward trend of the underlying. In case of rises beyond such level, at maturity the investor will receive the Cap level.
Constant Leverage Certificates
These certificates replicate linearly the underlying index with a constant leverage effect. The incorporated leverage may be, for instance, x3, x4 or x5. These instruments replicate the daily performance of the underlying index multiplied
by the fixed leverage, either long or short.
No margins are requested and no stop loss mechanism is established like in the Mini Futures Certificates. The maximum loss is limited to the invested capital.
It is important to highlight that the constant leverage is recalculated daily, based on the closing price of the previous trading day of the leverage index, thus determining the so called “compounding effect” on a period of two or more days.
This means that the performance of the leverage indices, on a period longer than a single trading day, may differ from the performance of the underlying index in the same period of time multiplied by the leverage factor, for instance ±5. This effect is more evident the higher is the volatility of the underlying.
Variable Leverage Certificates
Leverage Certificates assign the right to buy (bull) or sell (bear) an underlying asset at an established strike price and date. This category includes Mini
Future Certificates. Leverage Certificates envisage full control over the underlying, whilst employing less capital than is required to invest directly
in the underlying (leverage effect). The presence of leverage effect makes it possible to amplify the performance of the underlying. With respect to Covered Warrants, the special features of these instruments are the following:
inclusion of a stop loss level whereby the loss of invested capital can be limited, through early redemption of the certificate;
matching of the price with the certificate's intrinsic value and independence from volatility of the underlying and time to maturity;
the daily variation in the strike price which incorporates the interest charged (bull certificate) or credited (bear certificate) by the issuer in order to structure the product.