If certificates are added to a portfolio of stocks, they can diversify the portion of the portfolio that is exposed to risk. However before investing in certificates, it is absolutely necessary to understand the properties of the type of certificate under consideration and to answer the following questions for oneself:
Today there exists a zoo of certificates with more and more complicated and obscure design principles. However, those certificates most in demand are still the classics, i.e. the discount certificates and the bonus certificates with their respective reverse designs.
The following chapters present the theory of these classics and discuss the applications in practice.
Attention: Certificates cannot be sold in certain countries such as the USA, Canada, Great Britain and Japan. However, as certificates are a combination of an investment in and the sale or purchase of options on an underlying asset, our results can be used for those combinations. E.g. a discount certificate is equivalent to a covered call, a combination of an investment in and the simultaneous sale of a call option on an underlying asset.
Warning concerning all certificates: Since from a legal point of view certificates have the same status as obligations, like state or corporate bonds, in addition to the risk of value fluctuations, there is also the risk of the issuer’s insolvency. This means that if the issuer becomes insolvent, the invested capital is completely lost, as happened with the bankruptcy of Lehman Brothers Inc. in September 2008. However, you can evaluate this risk by checking the credit-rating of the bank (practical tips).