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In an ever-evolving financial world, many savers find themselves at a crossroads: on one hand, the tradition of low-yield savings accounts; on the other, the uncertainty of the stock markets. In this scenario, a category of instruments emerges that combines protection and potential for returns: Investment Certificates (or simply Certificates). These financial products, which originated in Germany and are now increasingly popular in Italy, represent an innovative solution for those who wish to navigate the market waters with greater awareness and defensive tools.
Certificates are, in essence, securitized derivative financial instruments issued by financial institutions. Their value “derives” from the performance of an underlying asset, which can be a stock, an index, a commodity, or a basket of securities. Thanks to their flexibility, they allow for the creation of customized investment strategies capable of generating returns even in sideways or moderately bearish market conditions—a goal difficult to achieve with direct investment. This article offers a comprehensive guide to understanding their structure, the main types, and, most importantly, the risks to be aware of before investing.
Investment Certificates are complex financial instruments issued by banks or other financial institutions. From a legal standpoint, they are similar to debt securities, but their operation is more intricate. Each certificate is constructed by assembling various financial products, mainly options, to create a “package” with a specific risk/return profile. This process, called securitization, allows for the creation of instruments that offer payoffs not directly available on the market.
The central element of a certificate is its underlying asset, which is the financial asset to which its performance is linked. This can be a single stock (like Enel), a stock market index (like the FTSE MIB), or even commodities (like gold). In addition to the underlying asset, each certificate is defined by a maturity date, i.e., its expiration date, and a payment structure (payoff), which determines how and when the investor will receive proceeds. These instruments are traded on regulated markets of the Borsa Italiana, such as SeDeX and Cert-X, ensuring transparency and liquidity.
To understand how a certificate works, it’s helpful to think of it as a structure built with financial building blocks. The issuer combines various options to define a custom return profile. The key elements that define the structure of almost every certificate are the underlying asset’s reference price (strike), the maturity date, and, most importantly, the barrier. The latter is a price threshold that, if not breached by the underlying asset, activates capital protection mechanisms or the payment of a premium.
The barrier is the true heart of many certificates: a price level that acts as a shield. As long as the value of the underlying asset remains above this threshold, the investor can benefit from capital protection or periodic returns, even if the market moves sideways or slightly downward.
Other important parameters are the coupons, which are periodic premiums that can be unconditional or conditional on the barrier being respected, and the Cap, a maximum limit on the potential return. The combination of these elements allows for the creation of a wide range of products, each with a different balance between risk and opportunity. The investor knows in advance the potential gain or loss scenarios, depending on the performance of the underlying asset.
The market offers a wide range of certificates, which can be classified based on their level of capital protection. This distinction is fundamental for choosing the instrument best suited to one’s risk profile. There are three main macro-categories that cater to very different needs, from the most cautious investor to the most speculative one.
These instruments are designed for investors with the lowest risk appetite. Their main feature is the full guarantee of the invested capital at maturity, regardless of the underlying asset’s performance. For example, if a capital protected certificate is linked to the performance of a stock and that stock plummets, the investor will still receive 100% of the nominal value on the maturity date. The downside is that the potential for gain is usually limited compared to other types.
This is the largest and most popular family of certificates, which includes products like Bonus Certificates and Cash Collect Certificates. Capital protection is “conditional” on the barrier being respected. As long as the value of the underlying asset does not fall below this level, the capital is safe. Cash Collects, which are very common in Italy, pay periodic coupons if, on the observation dates, the underlying asset is trading above the barrier. These instruments are built using complex strategies based on call and put options, which determine their risk and return profile.
Leveraged certificates are instruments intended for experienced investors and speculators. Their goal is to amplify the performance of the underlying asset, both positively and negatively. A “2x” leverage on a stock, for example, will double the gains if the stock rises, but it will also double the losses if it falls. Due to the high risk of losing the entire capital, they are suitable for very short-term trading strategies, closely linked to the volatility of the underlying asset.
Despite their protective features, certificates are not risk-free. A thorough understanding of these aspects is a crucial step for a well-informed investment. The dangers arise not only from market movements but also from the structure of the product itself and the issuer who created it.
This is perhaps the most underestimated risk. Certificates are legally bonds issued by a bank. If the issuing financial institution were to fail, the investor could lose their entire invested capital, even if the barrier was never breached. This is because certificates are not protected by interbank deposit guarantee funds. The financial soundness of the issuer is therefore a primary factor in choosing a product.
Unlike an ETF, which physically owns the shares of its index, a certificate represents a contractual obligation with the issuer. Its security depends entirely on the issuing bank’s ability to honor its commitments.
This is the most intuitive risk: if the underlying asset performs negatively and breaches the barrier, the conditional capital protection is lost. At maturity, the certificate will redeem an amount commensurate with the negative performance of the underlying asset, causing a partial or total loss of capital. Furthermore, during its life, the price of the certificate on the secondary market fluctuates based on various factors, including the value of the underlying asset, volatility, and the time remaining until maturity.
This risk arises when an investor has difficulty selling their certificate on the secondary market before maturity at a fair price. Although issuers commit to ensuring tradability through a Market Maker, under extreme market conditions, the spread between the bid (buy) and ask (sell) price could widen, making the sale less advantageous.
The structure of certificates can be very complex. Mechanisms such as the memory effect on coupons, multiple barriers, or accessory options require careful analysis. The difficulty in fully understanding how these instruments, born from sophisticated financial engineering techniques, work is a risk in itself. It is essential to carefully read the Key Information Document (KID), the document that describes in detail all the product’s features and risks.
Certificates are not a one-size-fits-all instrument, but rather a “tailor-made suit” that must fit the goals and risk tolerance of each individual investor. For the cautious investor, who prioritizes capital preservation, capital protected certificates can be an alternative to deposit accounts, offering minimal participation in market upturns with no risk of loss at maturity. However, it is the moderate investor who will find the most interesting solutions in this world.
Those seeking a return higher than that of bonds but who do not want to be fully exposed to stock market volatility can find an excellent compromise in conditionally protected capital certificates (like Bonus and Cash Collect). These instruments are ideal for those who expect stable, sideways, or moderately bullish markets, allowing them to receive periodic coupon flows while protecting the investment from limited downturns. Finally, the aggressive investor or trader can use leveraged certificates for short-term speculative strategies, aware of the high risks involved.
The certificate market in Italy has seen exponential growth in recent years, becoming a significant component in the portfolios of Italian households. According to data from ACEPI (Italian Association of Certificates and Investment Products), the volumes placed have reached record figures, testifying to a growing interest from investors and advisors. In 2023, total volumes exceeded 25 billion euros. This success is driven by several factors: returns that are often more attractive than government bonds in a low-interest-rate environment and the ability to obtain periodic coupon flows.
Most trading takes place on the SeDeX market of Borsa Italiana, a regulated market that ensures transparency and liquidity, and on the multilateral trading facility Cert-X. Growth has also been supported by continuous product innovation from issuers, who offer increasingly sophisticated structures to meet the diverse needs of investors. The dominant category remains conditionally protected capital certificates, which account for the vast majority of issues.
Investment Certificates represent a fascinating synthesis between the prudence of Mediterranean financial tradition and the drive for innovation in global markets. They are neither inherently good nor bad, but versatile instruments that, if understood and used correctly, can offer effective solutions for portfolio diversification and optimization. They provide the opportunity to achieve attractive returns even in uncertain market scenarios, protecting capital from limited downturns.
However, their complexity should not be underestimated. Issuer risk, the functioning of the barrier, and other structural features require careful analysis before any investment. The key to using certificates profitably lies in knowledge: it is essential to study the information document (KID) and choose only products aligned with one’s own goals and risk tolerance. In a well-balanced portfolio, certificates can be a valuable ally for navigating the complexity of modern financial markets.
They are derivative financial instruments, issued by financial institutions, whose value depends on an underlying asset (like a stock, index, or commodity). They offer risk and return profiles that can be customized, positioning themselves as a middle ground between bonds and stocks. They allow for the implementation of complex investment strategies that are not feasible with the direct purchase of the underlying asset.
There are three main risks. The first is market risk, related to the performance of the underlying asset, which can cause significant losses if the value falls below the barrier. The second is issuer risk, which is the danger that the bank that issued the certificate could fail and be unable to repay the capital. Finally, there is liquidity risk, which is the difficulty of selling the certificate before its maturity at a fair market price.
No, they are not instruments for everyone. They are better suited for investors who already have some knowledge of financial markets and complex products. They are suitable for those who wish to diversify their portfolio, have specific goals, and a defined risk tolerance, but they are not ideal for beginners or those seeking a total guarantee on their invested capital.
Capital protection is almost always ‘conditional.’ This means that the invested capital is fully repaid at maturity only on the condition that the value of the underlying asset does not fall below a predetermined level, called the ‘barrier.’ If the barrier is breached, the protection is lost, and the investor suffers a loss proportional to that of the underlying asset.
Cash Collect certificates are structured to generate an income stream through the payment of periodic coupons. The payment of these coupons is usually conditional: it occurs only if, on the observation dates, the value of the underlying asset is above a certain barrier level. This mechanism allows for a potential return even in sideways or slightly bearish market phases.