Index or participation certificates are simple and transparent investment products that benefit from an increase in the underlying price, regardless of the investment horizon. They allow you to invest specifically in certain countries, sectors, and topics such as sustainability or megatrends.
Investing in index/participation certificates
With index/participation certificates, you can easily participate 1:1 in the performance of an underlying. The mechanism is relatively simple. If the price of the underlying asset increases by 5% during a certain period, the price of the certificate also increases by 5%. The same correlation also applies in the event of price losses: if the price of the underlying asset falls by a certain percentage, the price of the certificate also falls by the same percentage. Index/participation certificates are low-cost investments, as in principle no issue surcharge is charged by the issuer. Index and participation certificates differ in their underlying. Index certificates are always based on a stock index. Since an index contains many individual stocks, investors in index certificates invest diversified in several stocks with only one transaction. This also reduces the overall risk of the investment. Since the composition of indices is publicly known, the pricing as well as the opportunities and risks of index certificates are transparent and easy to understand. In the case of participation certificates, the underlying can be a commodity, a fund, or even an ETF. If the underlying is a commodity, you can invest in different types of commodities such as oil or gold.
Index/participation certificates also come with a ratio. Depending on the price of the underlying, the subscription ratio is 1:1, 1:10 or even 1:100. Especially for underlyings with a high price, such as the EURO STOXX 50®, index certificates are traded with a ratio of 1:100. This means that if the index level of the EURO STOXX 50® is 3,400 points and the subscription ratio is 1:100, the index certificate on the EURO STOXX 50® costs 34 euros. Index/participation certificates have no protective mechanism, such as a capital guarantee. They are entirely subject to the price risk of the underlying asset: falling underlying prices also result in corresponding price losses for the certificate.
The term of index/participation certificates is usually unlimited. As a result, such certificates are also called open-end certificates. Occasionally, however, there are also certificates with limited terms. These already have a predefined term at the time of issue and thus a fixed maturity.
Payoff profiles
The payoff profiles show the profit or loss of an
investment, if the underlying rises or falls.
Advantages
- Easily participate in the performance of a variety of underlyings such as stocks or commodity indices
- Investors participate directly 1:1 in the performance of the underlying. This creates theoretically unlimited profit opportunities in the event of positive market performance of the underlying
- Broad risk diversification even with low capital investment and with only one certificate
- Index certificates usually not have unlimited terms
Risks to be considered
- In the event of falling markets, index/participation certificates incur price losses. There is no capital guarantee and if the underlying asset develops toward 0, a total loss is possible
- Investors bear the credit risk of the issuer, i.e., the risk of changes in creditworthiness or insolvency
- This security is not covered by any deposit insurance scheme. Investors are exposed to the risk that Erste Group Bank AG may not be able to meet its obligations in the event of insolvency (illiquidity, over-indebtedness) or an official order (bail-in regime). There is a possibility of a total loss of the capital invested
- Underlyings quoted in foreign currencies have a currency risk