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Financial Products Refer To Instruments That Help You Save, Invest, Get

Financial products help individuals save, invest, obtain insurance or get a mortgage. They are issued by banks, financial institutions, and other organizations. Financial products are categorized based on factors like type, underlying asset class, risk, and potential return. Common financial products include shares, bonds, treasury bills, options, mutual funds, certificates of deposit, and annuities. More complex products with higher risks are credit default swaps and collateralized debt obligations. When choosing financial products, a key consideration is one's risk tolerance as riskier options tend to provide higher returns on average but also more volatility.

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Arshad Shaikh
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65 views2 pages

Financial Products Refer To Instruments That Help You Save, Invest, Get

Financial products help individuals save, invest, obtain insurance or get a mortgage. They are issued by banks, financial institutions, and other organizations. Financial products are categorized based on factors like type, underlying asset class, risk, and potential return. Common financial products include shares, bonds, treasury bills, options, mutual funds, certificates of deposit, and annuities. More complex products with higher risks are credit default swaps and collateralized debt obligations. When choosing financial products, a key consideration is one's risk tolerance as riskier options tend to provide higher returns on average but also more volatility.

Uploaded by

Arshad Shaikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial products refer to instruments that help you save, invest, get

insurance or get a mortgage. These are issued by various banks, financial


institutions, stock brokerages, insurance providers, credit card agencies
and government sponsored entities. Financial products are categorised in
terms of their type or underlying asset class, volatility, risk and return.
Types of financial products
Shares: These represent ownership of a company. While shares are initially issued by
corporations to finance their business needs, they are subsequently bought and sold by
individuals in the share market. They are associated with high risk and high returns. Returns on
shares can be in the form of dividend payouts by the company or profits on the sale of shares in
the stockmarket. Shares, stocks, equities and securities are words that are generally used
interchangeably.

Bonds: These are issued by companies to finance their business operations and by governments
to fund budget expenses like infrastructure and social programs. Bonds have a fixed interest
rate, making the risk associated with them lower than that with shares. The principal or face
value of bonds is recovered at the time of maturity.

Treasury Bills: These are instruments issued by the government for financing its short term
needs. They are issued at a discount to the face value. The profit earned by the investor is the
difference between the face or maturity value and the price at which the Treasury Bill was
issued.

Options: Options are rights to buy and sell shares. An option holder does not actually purchase
shares. Instead, he purchases the rights on the shares.

Mutual Funds: These are professionally managed financial instruments that involve the
diversification of investment into a number of financial products, such as shares, bonds and
government securities. This helps to reduce an investors risk exposure, while increasing the
profit potential.

Certificate of Deposit: Certificates of deposit (or CDs) are issued by banks, thrift institutions and
credit unions.They usually have a fixed term and fixed interest rate.

Annuities: These are contracts between individual investors and insurance companies, where
investors agree to pay an allocated amount of premium and at the end of a pre-determined
fixed term, the insurer will guarantee a series of payments to the insured party.
Complex Financial Products
There are certain financial products that are highly complex in nature. Among these are:
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1. Credit Default Swaps (CDS): Credit default swaps are highly leveraged contracts
that are privately negotiated between two parties. These swaps insure against losses
on securities in case of a default. Since the government does not regulate CDS
related activities, there is no specific central reporting mechanism that determines
the value of these contracts.
2. Collateralized Debt Obligations (CDO): These are securities that are created by
collateralizing various similar debt obligations such as bonds and loans. CDOs can be
bought and sold. The buyer gains the right to a part of the debt pools principal and
interest income.
CDS and CDO products played a major role in the financial crisis of 2008. During these troubled
times, CDO ratings reflected incorrect information on the credit worth of borrowers, concealing the
underlying risk in mortgage investments. Meanwhile, the size of the CDS market far exceeded that
of the mortgage market in mid-2007. Thus, when the defaults began to unfold during the financial
crisis, banks were not in a position to bear the losses.
One of the most significant factors to consider when choosing financial products is your risk
appetite. Risky investments are usually associated with higher returns than safer investments.
According to empirical data, shares usually outperform all other investments over the long term.
However, in the short term, shares can be extremely risky due to their random and volatile nature.

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