How do leverage products work?
Higher opportunity, higher risk: with leverage products in the form of warrants, factor certificates or knock-out products, you can additionally amplify price movements and achieve disproportionately high profits in a short period of time - but you also accept a higher risk.
Find out here how leverage products work, what the opportunities and risks are and how best to trade leverage products.
Table of contents
- What are leveraged products?
- How do leverage products work? Explanation and example
- Advantages and opportunities of leverage products
- Risks of leverage products
- What leverage products are there?
- How can you trade leveraged products?
Leveraged products: The most important facts in brief
- Leverage products are structured securities or securitized derivatives.
- They relate to an underlying asset and depend on the price of a specific share or index, for example.
- The leverage effect can have both a positive and negative impact on the price development and therefore has a higher risk, but also higher profit opportunities than other investment products.
- Popular leverage products are warrants, knock-out products and factor warrants or factor certificates.
- Leverage products are particularly suitable for experienced investors and less so for beginners.
What are leveraged products or leveraged shares?
Leverage products are structured securities that relate to an underlying asset. They differ significantly from investment products in terms of their risk/reward profile.
They are suitable for investors who are willing to take risks: the leverage effect allows you to participate disproportionately in the performance of an underlying asset. If this moves in the desired direction, a high profit is possible - but if not, there is a risk of total loss.
You can use leverage products for both rising and falling prices. This means that investors can profit from both positive and negative market movements, depending on whether they are speculating on a rise or a fall in the underlying asset.
Good to know: The terms “leveraged shares” or “shares with leverage” are often used for leveraged products that relate to the underlying value of a share. However, leveraged products are not actually shares in the true sense of the word.
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How do leverage products work? Explanation and example
The leverage serves as a power amplifier for leverage products: it indicates the ratio in which a security tracks the price movement of the underlying asset.
In other words: How many times more the value of the product rises or falls when the underlying asset rises or falls. The “leverage effect” can therefore result in high profits, but there is also a risk of equally high losses, including the total loss of the capital invested.
Good to know: The leverage changes with the price movement of the underlying. Only in the case of factor certificates does the leverage remain constant over time.
Example of a share with leverage
The following principle applies to leveraged products: the greater the leverage, the greater the chances of profit and the greater the risk of loss.
Let's assume you invest EUR 100 in a share with a leverage of 5, which means that every percentage change in the underlying is increased by a factor of 5.
If the share price rises by one percent, the percentage change with a leverage of five is five percent. Your stake of EUR 100 would therefore increase by five percent, which corresponds to a profit of EUR 5. However, if the share price falls by one percent, you also lose five percent of your stake, which can also lead to a total loss if the price falls by a larger amount.
Advantages and opportunities of leverage products
The biggest advantage of leverage products is the opportunity to make quick and high profits. In addition, leveraged products allow investors to work with significantly larger sums than they actually have available. Here are the advantages of leverage products at a glance:
- Disproportionately high profit opportunities: the leverage effect means you can achieve high profits with a small capital investment if the underlying asset moves in the desired direction.
- Wide range of possible uses: You can use leverage products both when prices are rising and falling. This offers flexibility and the opportunity to profit in different market phases or to hedge existing positions.
- Access to different markets: Are you interested in oil, gold & co? Leverage products give you access to different markets and underlyings. You invest in a security and not physically in the commodity - this is simpler and cheaper.
Risks of leverage products
Trading in leverage products is also associated with high risks such as a total loss. Leverage products are therefore more suitable for experienced investors who have obtained detailed information about the respective products. You should be aware of the following risks if you wish to trade in leverage products:
- Increased price fluctuations: Leverage can have both a positive and a negative effect on price performance. Price fluctuations in the underlying asset can therefore not only lead to high profits, but also to considerable losses or even the total loss of the capital invested.
- Issuer risk: Structured leverage products are essentially bonds. If the issuer becomes insolvent, there is therefore a risk of loss or even total loss of the invested capital. If there is a post-closing obligation, investors may even suffer more than a total loss.
- Pricing by the issuer: Although the prices of leverage products are based on the prices of the underlying asset, they are calculated independently by the issuer due to the specific structure of the leverage product. This can lead to price distortions that do not fully reflect market conditions.
What leverage products are there?
There are different types of leverage products. The three most popular are warrants, knock-out products and factor warrants.
Warrants
When you buy warrants, you acquire the right to buy the underlying asset at a specified price at a specified time. You pay the seller a premium for this right. In most cases, the seller does not deliver the physical underlying asset, but agrees a cash settlement in which the difference between the strike price and the current market value is settled.
Knock-out products
Knock-out products, also known as knock-out securities, minis, turbos or simply knock-outs, react linearly to fluctuations in the price of the underlying asset. As soon as the underlying reaches or exceeds a fixed knock-out threshold, these certificates expire immediately. The transparent price development makes it easier to understand the pricing of knock-out products than warrants.
Factor warrants
Factor warrants, also known as factor certificates, have a constant leverage (factor) on each trading day and can be traded over a longer period of time. With factor long warrants you bet on rising prices of a certain underlying asset, while with factor short warrants you speculate on falling prices. The leverage, which is indicated by the factor, determines the strength of the price change.
Tip: At the Stuttgart Stock Exchange, you can trade a wide range of leveraged products flexibly and easily during trading hours from 8 a.m. to 10 p.m. Our trading experts make a decisive contribution to the quality of the buy and sell prices, as a better price has a significant impact on overall performance, especially for short-term investments.
How can you trade leverage products?
If you want to trade leveraged products, you should already have some trading experience and a certain willingness to take risks. As the risk of loss is greater with leveraged products than with other investment products, only invest capital that you can bear to lose.
Most leverage products are more suitable for short-term speculation and not for long-term investments. If you want to invest for the medium term, it is best to opt for warrants without a knock-out threshold.
You can use the Stuttgart Stock Exchange's Finder tools to search for, buy and sell suitable leveraged products. Products with lower leverage usually have a higher price, whereas certificates with high leverage are cheaper but also riskier. It is best to monitor the market in real time, as even small price movements can have a major impact on your products.
By the way: When buying or selling investment or leverage products via the Stuttgart Stock Exchange, no fees are charged up to an amount of EUR 1,100.
Frequently asked questions about leverage products
How does leverage work with shares?
Leverage on shares or leverage products enables investors to achieve higher profits with a comparatively low capital investment. If a share rises by one percent and you use a leverage of 5, the value of your investment rises by five percent.
However, leverage also amplifies losses: if the share falls by one percent, your investment loses five percent in value. High leverage can lead to high profits, but can also quickly lead to high losses, including the total loss of the capital invested.
Leverage products such as warrants or knock-out products offer leverage, not the purchase of a share itself.
Which leverage products for beginners?
Leverage products such as warrants or knock-out products are less suitable for beginners due to the higher risk of loss and the more complex structure. You should therefore only invest in leverage products if you already have trading experience and are prepared to monitor the market in real time so that you can act quickly when prices change. It is also important that you inform yourself thoroughly and only invest capital that you can afford to lose.
What are the best leverage products?
Which leverage products are suitable for you depends on your individual investment objectives and your risk tolerance. For example, factor certificates are well suited to investors who are looking for a clear and transparent leverage effect via a fixed factor. Warrants, on the other hand, offer high profit potential, but are more complex and riskier.
Where can you buy leverage products?
You can buy leverage products conveniently via various trading platforms and exchanges, for example on the Stuttgart Stock Exchange. This offers a wide range of leverage products, including warrants, knock-out products and factor warrants.
Thanks to the user-friendly trading platform and transparent pricing, you can process your transactions efficiently and securely. With the Finder tool, you can easily search for and buy the leverage products that suit you.
Trading leverage products on the Stuttgart Stock Exchange
The three most popular leverage products are warrants, knock-out products and factor warrants. You can trade a wide range of leveraged products flexibly and easily from 8 a.m. to 10 p.m. via the Stuttgart Stock Exchange: Our trading experts make a decisive contribution to the quality of the buy and sell prices. This is because a better price has a significant impact on overall performance, especially for short-term investments.
By the way: There is no fee for buying or selling investment or leverage products via the Stuttgart Stock Exchange up to an amount of EUR 1,100.
Three reasons for leverage products
- Disproportionately high profits are possible with a lower capital investment compared to a direct investment.
- Are you interested in oil, gold & co. With leverage products, you invest in a security and not physically in the commodity - it's simpler and cheaper.
- Depending on market expectations, you can bet on rising markets with call securities or falling markets with put certificates.
Risks of leverage products
- The leverage effect can have both a positive and a negative impact on the price development due to the price fluctuations of the underlying asset.
This can also result in the total loss of the capital invested. - Structured leverage products are essentially bonds.
If the issuer becomes insolvent, there is therefore a risk of loss or even total loss. - The prices are based on the prices of the underlying asset.
However, the issuer calculates the prices independently due to the existing structure of the leverage product.
Trading in leverage products is associated with both opportunities and risks.