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Investment certificates

Structured products

Stock exchange trends in recent years have indicated to many investors what "responsible investing" means - that it is not just about relying on market growth, but also includes adequate adjustments of expected revenues and risks, both to the market and individual objectives and requirements.

In addition to traditional investment vehicles, a new generation of state-of-the-art financial products has appeared in the market - structured products.

The market for these advanced structured products is at its very initial stage in the Czech Republic right now. In the years 2002-2003, Czech financial institutions launched their own products - structured notes and the issues focused mainly on full capital guarantees at that time.

However, even such an offering has not dawn the attention of all investors. Therefore, financial institutions began to adopt state-of-the-art structured products successfully issued in foreign markets.

Structured products may be viewed from a number of different perspectives. These new products have reported a boost in recent years. In principle, advanced structured products can be classified depending on whether they are leveraged or not - that is if they are investment or leveraged products.

Modern structured products

Investment certificates

Of all the innovative financial products issued by financial brokers in recent years, the investment product class called the "investment certificate" deserves special attention.

From pure legal viewpoint, these certificates are typically the so-called notes that do not constitute any shareholder rights, even though their underlying assets include stock. The investor buys a note/certificate from the issuer and is entitled to have the note redeemed later. Thus, the issuers may use funds acquired from the investors for a limited time. A critical factor in the selection of a certificate is the quality of its issuer and, therefore, only products from issuers with superb creditworthiness are recommended for acquisition.

Risks inherited in certificates include:

  • Credit risk (issuer risk): a risk of the relevant issuer’s illiquidity. As a result, the issuer may not be able to redeem the certificate;
  • Market risk: this is a risk of market rates volatility as well as fluctuations in the value of financial instruments;
  • Inflation risk: the inflation risk is generated by ongoing currency devaluation, to which each currency is subject to a certain degree;
  • Currency (foreign exchange) risk: the foreign exchange risk is assumed only by an investor investing into financial products sensitive to foreign exchange rate fluctuations. Any security issued in a foreign currency is subject to the foreign exchange risk.

The structure of standard investment products, such as index certificates, is fairly easy to understand. The underlying asset is the relevant index and its value development can be easily compared with the development of the chosen index certificate. There is not much room for the issuer to offer this product with a price margin. When the certificate structure becomes more complicated, though, it is much more difficult to set the right price for the certificate. This situation may be used by financial brokers to increase their profit margins. Therefore, investments into overcomplicated products cannot be recommended and retail investors should definitely avoid such investments. It should be pointed out that simple-structure products are those that are mostly demanded in the investment certificate market and report the highest trading volumes.

Benefits of the certificates:

  • Transparency: The investor always knows the IC price, market and the instrument purchased;
  • Liquidity: ICs can be directly traded on regulated markets, banks of issue are obliged to set the IC purchasing/selling price on an ongoing basis;
  • Versatility: Certificates may be used to participate not only in a growing, but also in a stagnating or weakening market;
  • Adaptability: ICs are typically offered at prices close to CZK 100 or 1000. Thus, issuers try to approach investors with lower disposable funds available;
  • Favorable costs: Due to their simple structure, certificates are cheaper than funds or active trading. An exception may be represented by more complex products where lower fees are applied;
  • Tax planning: After the tax test expires (six months in the Czech Republic), capital gains on certificates are tax exempt. Some securities even allow payable dividends to be obtained.

Certificate risks and gains / profile

Certificate risks and gains - profile

Groups of certificates

  1. Index certificates: These are the simplest certificates both from the perspective of their structure and behavior. The certificate reflects the behavior of the underlying asset (index), both in the positive and negative direction. It represents a simple, diversified investment where, using a single product, the investor is able to limit the involved risk, while participating in the performance of the underlying index in a 1:1 ratio;
  2. Strategic certificates: ICs that copy the development of a certain underlying asset - basket of shares that may be regularly and automatically updated according to pre-defined criteria;
  3. Basket certificates: ICs that may consist of a basket including selected shares (liquidity, market cap, growth opportunities). The baskets may be industry-based or geographically focused;
  4. Guaranteed certificates: Guaranteed certificates combine 100% investment capital protection with theoretically unlimited gains;
  5. Bonus certificate: These certificates offer full and unlimited participation in the positive development of the underlying asset; upon maturity, the nominal amount plus a bonus are paid out, unless the IC value does not hit or drop below the pre-set level;
  6. Discount certificate: This is a financial instrument allowing investors to profit from stagnating markets as well. It is suitable for investors who do not expect dynamic market growth in the future. The investor is granted a discount on the underlying assets upon subscription;
  7. Outperformance certificate: This IC is associated with a pre-set participation factor allowing overproportional participation in the positive development of the underlying asset.

This document has been drafted by Expobank CZ and is intended as a background material for discussion only. Neither this document nor any other statement (oral or other) made at any time in connection herewith is an offer, invitation or recommendation to acquire or dispose of any securities or execute any transaction. Potential parties to a contract are recommended to perform an independent review and/or obtain independent professional advise and make their own conclusions with respect to the financial benefits and risks of such a transaction and to the legal, regulatory, credit, tax and accounting aspects relating to their specific circumstances. The distribution of this document does not constitute any obligation for Expobank CZ to execute the transaction. Any offer is to be made later and based on a contract, satisfactory documentation and market conditions. Expobank CZ does not make any representations with respect to any issue or to the accuracy or completeness of any statements made herein or made at any other time, both orally or otherwise, in connection herewith, and any liability (whether by omission or otherwise) relating to any such issues or statements is hereby expressly excluded, unless caused by fraud or willful default. In this document, "Expobank CZ" means Expobank CZ a.s., its directors, executives, agents or employees.

Investment certificates

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