The difference between knock-out certificates and warrants

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Both leverage products are often confused or considered synonymous. However, there is of course a reason why knock-out certificates and warrants have different names. They are clearly different trading instruments. But how do they differ?

First of all, it should be clearly mentioned that the risk of loss for the investor is significantly higher with knock outs than with warrants. The reason for this is the knock-out threshold. With warrants, this only plays a role at the end of the term, but an unsecured certificate loses value immediately if the threshold is exceeded. However, this is not the main difference. The difference actually lies in the fluctuation. While the influence of market changes is considerable with warrants, these can be ignored with knock-out certificates.

How volatile a market is is therefore irrelevant. Of course, it can be an indication for the trader that prices are falling or rising, but this is hardly noticeable, if at all, in knock outs. Instead, the leverage is decisive for knock-out products. It is precisely this that determines how high the profit or loss will be.

But how risky is trading really?

Trading is speculative in any case, but there is also a way for investors to protect themselves. This is possible by using a stop loss. Some knock-out certificates give investors the opportunity to use this safety mechanism. It should be noted, however, that this is not free and usually costs extra money. But a hedge is guaranteed. If the price of the share or of an index falls, the stop loss represents the new knock-out threshold. In this case you do not suffer a total loss. Instead, some money can still be hedged, but this also corresponds to a loss.

Markets for trading Knock Out Certificates

Trading in knock-out certificates is possible via issuers. These are usually online brokers or local brokers. However, online brokers are now much more common and are therefore considered the average issuer of a knock out certificate. However, brokers do not necessarily have to be the issuers. It is also possible that another financial institution acts as issuer. It should be noted that the investor can also always incur a risk from the issuer. Why? Knock-out certificates are bearer bonds issued by the issuer. If the broker goes bankrupt, you also lose your money. The statutory deposit protection of 100,000 euros on financial products does not apply in this case.

As an investor, you therefore have the choice of trading directly via a https://exness-ar.com/tatbiq-exness-trader/ or via an issuer. Both on-exchange and off-exchange trading is possible. When making your decision, take into account all costs incurred.

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A brief summary: The most important facts about knock-out products

Trading a knock-out certificate therefore depends on the leverage. The higher the leverage, the greater the profit or loss. Furthermore, the fluctuations in the market do not play a role with knock out products. Instead, investors should keep an eye on the leverage and, if necessary, hedge their own funds with a stop loss in order not to suffer a total loss.

However, it is not only important to choose a certain certificate, but also the right issuer. A bank, broker or other financial institution can offer both on-exchange and off-exchange trading. The trading conditions should always be kept in mind.

What constitutes a knock-out certificate is summarised again below:

Knock outs are traded through issuers.
There is no deposit protection and a loss of 100 percent is possible
A knock out certificate is a debt security
It can be bet on both rising and falling prices
When buying knock outs, investors can set up a stop loss

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