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Here, the performance of the underlying is leveraged - both upwards and downwards. Example: A leverage certificate has a leverage of 3. This means that if the price of the underlying instrument rises by 1 percent, the leverage certificate increases by 3 percent. If the price falls by 1 percent, the leverage certificate also triples this downward movement. But that's not all: leverage certificates always have a knock-out threshold. If the underlying reaches or falls below this threshold, the relevant leverage certificate usually expires worthless. Incidentally, there are also leverage certificates with which investors can participate in falling prices. This type of derivative is not for the faint of heart and is not suitable for beginners!

Not to the certificates, but very well to the derivatives belong warrants. Similar to leverage certificates they have a leverage. Only this leverage changes during the term, the price calculation is much more complicated. It is practically impossible to determine the price of warrants yourself. It is calculated by the trader who works for the issuer. But there is no knock-out threshold for this, which makes the paper worthless in one fell swoop.

Another category of derivatives are reverse convertibles. They initially function like normal bonds and even pay comparatively good interest, often with high single-digit interest coupons. But the issuer has the choice of paying back the nominal value at maturity, i.e. the investor's stake, or also the share of the underlying security instead. Which would be quite a losing proposition for the latter if its price plunges during the term. So with derivatives, you should always take a close look at what you are getting into.

Another special feature: the price is always set by a market maker.

How high or low the price of a derivative is does not depend on supply or demand. It is recalculated at each point in time depending on the price of the underlying. As an investor, you can therefore be practically indifferent to the demand for a derivative you are interested in. This is because the prices are set by the traders commissioned by the issuer. If you want to buy a certificate, you get the prices from the market maker like Exness - this also applies to a sale before maturity.

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Important: Consider issuer risk

Derivatives carry a certain risk beyond the price development: the so-called issuer risk. This is because, unlike shares, derivatives are not tangible assets, but merely a promise of payment from the issuer (this is called a "bearer bond"). Whether the issuer keeps its promise depends on its ability to pay. Therefore, derivatives of issuers who are in financial difficulties are taboo. However, the risk candidates can usually be found out with the risk monitor of the German Derivatives Association. There you can register and enter the derivatives you are interested in. If something changes in the risk class, you will be informed by e-mail.

The most important points at a glance:

    In finance, derivatives are products whose price depends on another product, known as an underlying asset. 
    For private investors, important derivatives are mainly certificates (e.g. index, discount or leverage certificates), reverse convertibles and warrants.
    There are derivatives with a fixed term and those that run indefinitely ("open end").
    Derivatives are subject to issuer risk: they are merely a debt security, i.e. a promise of payment by the issuer. Unlike shares, for example, they do not represent a tangible asset.

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