A certificate securitises participation in the price development of particular securities or securities products.
The holder of a certificate participates, for example, directly in the price development of an index (index certificate) or in that of a specially created basket of shares (basket certificate). Even though certificates are mostly based on equities or equity indices, from a legal standpoint they are considered bonds and do not in any way certify the right of ownership or shareholder privileges. The investor receives a law of contract from the issuer, to whom he temporarily lends his money.
Certificates are freely tradable on each exchange trading day and can have limited or unlimited maturity. They do not entail regular earnings payouts and usually have a variable repayment amount. Their price development is coupled to that of the underlying security. Aside from equities and equity indices, currencies, interest rates and resources are other possible underlyings for certificates.
Certificates are investment products. In contrast to leverage products, investment products enable the investor to participate one-to-one in the performance of the underlying security. Thus, these products are best suited for conservative investment strategies. Discount, basket and index certificates, as well as reverse convertibles belong to this category.
Important provisions that govern the actions of certificate issuers are covered by the German law for capital investment firms, known as KAGG.
