Why Investors Use Certificates

As with other investment vehicles, certificates have unique advantages and disadvantages.

Some advantages:

  • Access to the world. Certificates allow investors to invest in a range of assets from around the world: multinationals, major indices, currencies, thematic baskets and even oil.
  • Diversity. Certificates have a broad range of underlying values, such as shares, indices, baskets, etc., with different maturity dates and exercise prices.  Because of the wide variety of asset classes, sectors and geographical regions to which they provide access, certificates enable investors to diversify an existing portfolio.
  • Liquidity.  The liquidity of certificates is ensured by their issuer, who undertakes to provide a buy price and a sell price at all times.
  • Risk limited to original investment. Certificate investors always know the maximum loss they can incur. In the worst case, they cannot lose more than the amount of their initial investment—the certificate price.
  • Hedging. The price of certain certificates moves in the opposite direction to that of the underlying assets. This allows investors to hedge their portfolio against the risk of a fall in the market or to take advantage of a decline in the price of the underlying securities.

Some disadvantages:

  • Time may affect the value of a certificate. Depending on the certificate product type, time decay may have a positive influence on the price of a certificate. It may also have very little effect at all.
  • Leverage can work against investors. With certificates, price movements in all directions are magnified, so a small adverse movement in the underlying security's value can have a major impact on the value of the certificate. Leverage explains why certificate premiums frequently rise or fall by more than 50% in a day.