With Factor Certificates you can indirectly invest in stocks, indices and other assets using leverage, which is constant on a daily basis. This means potential higher gain but also potential higher loss. In the worst case investors may lose the entire capital they invested. There are additional financial risks associated with investing in these products, which can be found below.
Factor Certificates are leveraged products. Generally, investors in Long-products are expecting an increasing underlying price, while investors in Short-products are expecting decreasing underlying prices. Factor Certificates are only suitable for very experienced investors with a very short investment horizon who consciously accept the risks associated with Factor Certificates. The recommended holding period in the case of Factor Certificates is usually one day. They are suitable for experienced and active investors who have knowledge of highly leveraged financial investment products and understand that changes in the underlying prices have an effect on the value of the Factor Certificate, due to the leverage.
With Factor Certificates investors receive leveraged exposure to the underlying. The special feature of Factor Certificates is the constant leverage on each exchange trading day, which distinguishes this product type from other leverage products. In contrast to Warrants, they are not subject to volatility influences and reflect the price development of the respective underlying almost linearly.
Similar to Knock-out products Factor Certificates have a barrier, the Stop-Loss barrier. If the Stop-Loss barrier is breached, the Factor Certificate is initially suspended from trading for a certain period. During this period the strike, the ratio and the Stop-Loss barrier are re-adjusted so that the leverage corresponds again to its factor. The Factor Certificate is then “reactivated” and can be traded. If the intrinsic value of the Factor Certificate is equal to or below 0.20 Euro, the term of the Factor Certificate will end and the investor receives such intrinsic value, subject to a minimum redemption of EUR 0.001.
If the price of the Deutsche Aktienindex (DAX®) rises, the value of a Factor Certificate Long on the DAX® generally increases as well, whereas falling DAX® prices generally reduce the value of a Factor Certificate Long on the DAX® (subject to other parameters remaining unchanged). Vice versa, falling DAX® prices generally increase the value of a Factor Certificate Short on the DAX®, whereas rising underlying prices generally reduce the value of a Factor Certificate Short on the DAX® (subject to other parameters remaining unchanged).
Potential total loss: Due to the leverage, high losses are possible. In the worst case, the total loss of the invested capital is possible.
Disadvantageous in the sideways market: If the underlying asset tends to move sideways, Factor Certificates will develop unfavourably. The higher the leverage, the more volatile the sideways movement and the longer the holding period with regard to the Factor Certificates, the greater is the loss.
Financing costs: Financing costs are incurred daily, which reduce the intrinsic value of the Factor Certificate. Additionally, with each adjustment of the Factor Certificates costs are incurred.
Termination right of Issuer: The Issuer has the right to terminate the Factor Certificates at short notice.
Risk of Knock-out: If products issued by Goldman Sachs reach an intrinsic value of 0.20 Euro or less, the term of the Factor Certificate will end and the investor receives such intrinsic value, subject to a minimum redemption of EUR 0.001.
Issuer risk: A total loss is possible if the Issuer of the Factor Certificates and the Guarantor, The Goldman Sachs Group, Inc., become insolvent.