What are leverage certificates: In the following, we answer the question of how leverage certificates work. We will also talk about where you can buy leverage certificates.
What are leverage certificates?
With the help of a leverage certificate, you can speculate on the performance of a certain financial instrument. For example, there are leverage certificates on stock indices like the Dow Jones, on individual stocks or on commodities like gold.
How do leverage certificates work? A leverage certificate works similarly to a futures contract. Futures are forward contracts: When you buy a futures contract, you have the obligation to buy (long) or sell (short) by a certain date. If one later decides not to fulfil this obligation, one must make an "offsetting transaction". For example, if you have bought a "long" future, you can neutralise it by buying a "short" future.
The main attraction of futures trading is that you can use the so-called leverage effect. Here is an example: If a stock index is quoted at 10,000 points, without leverage you would actually need €10,000 to trade the index. When trading a CFD with Exness broker, on the other hand, you only have to deposit a certain amount of money as collateral (so-called "margin"). If the margin is 5%, for example, this results in a leverage of 20. In this case, you do not need €10,000 to trade the future, but only €500. If, on the other hand, you actually have 10,000 € at your disposal, you could even trade with 20 futures. Therefore, if the index rises by 100 points, the profit thanks to the leverage is not 100 €, but 2,000 € (100 points x 20).
The disadvantage of futures trading, however, is that this form of trading is mainly for professional traders. For example, it is necessary to open a trading account with a special futures broker. You also need to have sufficient capital (preferably between €10,000 and €20,000). This is because futures contracts are often very "high-value". For example, the Dow Jones Future has a value of €25. Every change in the Dow Jones by one. This means a profit or loss of five 20 € on the trading account. This value is much too high, especially for beginners.
How leverage certificates work
For this reason, leverage certificates are an interesting alternative to futures contracts of the. With a leverage certificate you can also profit disproportionately from the performance of a certain underlying instrument. However, unlike futures contracts, leverage certificates have a certain threshold at which they become worthless. This is why leverage certificates are also called "knock out" certificates. Because as soon as the predetermined price (= strike price) is reached, you are, metaphorically speaking, "knocked out". As an investor, you should also bear in mind that you have to pay a certain fee to the person who issues the certificate. This is also lost if you are knocked out.
How to buy leverage certificates: Leverage certificates are offered by the following credit institutions, among others:
- Commerzbank: Turbo Certificates
- ABN: Minifutures
- Deutsche Bank: Waves
- Citibank: Turbo warrants
How are leverage certificates traded? Leverage certificates can be bought through the banks that issue the certificates. On the other hand, it is also possible to buy the certificates on the stock exchange. The market leader in this area is the Stuttgart stock exchange.