What are certificates?

Certificates are securitized derivatives whose value depends on one or more underlying assets (for example, a stock, a stock index, a basket of stocks, commodities, currencies, etc.).

Rather than owning the underlying directly, when you buy a certificate you own a contract that tracks it under rules established at issuance. The certificate’s return depends on how the underlying asset behaves.

Certificates are traded on regulated markets (in Italy, for instance, on the SeDeX market) just like shares.

How do they work — key building blocks

To understand a certificate, it helps to break down its components:

Component	Role
Underlying	The reference asset (e.g. a stock, index, basket, commodity, currency)
Strike / reference price	The benchmark price fixed at issuance, used as a point of comparison to compute gain or loss
Barriers / protections	Some certificates include barrier levels or partial capital protection features
Derivative component	Embedded options (calls, puts) or other derivative instruments to engineer payoff structure
Maturity / term	The certificate has a defined lifespan; payoff is realized at maturity
Issuer credit risk	The cert is issued by a bank or financial institution — if it defaults, the certificate may become worthless even if the underlying did well

A certificate can be a simple replica of the underlying (with or without leverage) or incorporate more complex features, such as capital protection, periodic coupons, barrier clauses, autocallable features, “airbag” mechanisms, and so on.

Advantages and risks

Advantages:

1. Access to complex markets — with a certificate you can gain exposure to foreign indices, commodities, or baskets you might not reach easily.
2. Often lower upfront costs — no margin requirements like in pure derivatives.
3. Customizable structure — you can tailor features (protections, coupons, barriers) to match your risk/return profile.

Risks:

• Market risk / underlying risk: if the underlying performs poorly, the certificate can lose value.
• Liquidity risk: selling prematurely may be difficult or expensive.
• Issuer risk: if the issuing bank fails, your certificate might be worthless even if the underlying did well.
• Complexity: the structure may be tricky to understand — you need to read the prospectus carefully.
• Return caps and limitations: there may be a maximum “cap” or limits to participation in upside potential.

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Real-world example

Here is a real example of a certificate (at time of writing):

• ISIN: DE000VC653V4
• Underlying assets: a basket of four major Italian companies — Intesa Sanpaolo, Banca Monte dei Paschi, Bper, Stellantis
• Key features:
  • Conditional monthly coupons up to 1% if the underlying stays above a coupon barrier
  • Capital barrier at 45%: if the underlying falls below 45% of the initial value, capital protection is lost.
  • Airbag at 60%: if values fall but stay above this level, a buffer mitigates losses.

Hypothetical scenario:

• Each month, if the basket’s value stays above the coupon barrier (e.g. 60% of initial), the investor receives 1%.
• At maturity, if the worst-performing stock remains above the capital barrier (45%), the investor recovers at least the capital (or gains)
• If the worst-performing asset is below the barrier, the investor suffers a loss proportionate to that underlying, but mitigated by the airbag.

This certificate mixes yield (coupons), conditional capital protection, and loss mitigation via barriers and “airbag” mechanisms.