What are financial products?

15 . 10 . 18

By Ignatius Wilson

Just what are financial products? These are different to your everyday, consumer products which offer some utility in a good or service, like clothes or food or a taxi.

Financial products perform four very specific roles; they are offered by financial services providers (FSPs) and are usually non-physical. Let’s have a look at them here, as they are required in the financial landscape whether you are a banker, use a debit card or drive a car.

The four roles of financial products are to take cash deposits, make non-cash payments, manage a financial risk or make an investment.

Deposit-taking products include bank accounts and term deposits. If you use a credit or debit card or have a savings account you are using this style of financial product. This is similar to the ‘non-cash payment’ product, like direct debit, cheque or EFTPOS. Here is an example of physical financial product: the cheque. These are becoming rarer and rarer.

Insurance is the typical example of a product that manages a financial risk. When we consider insurances, almost every risk is considered to be a financial one. For example, loss of property means losing the money you purchased the property for; similarly,  causing loss to another party leaves you open to financial indemnity. Both of these scenarios can be insured against.

Investing makes use of some of the most obvious financial products: shares, derivatives, futures, forward contracts and many other products can be purchased to perform a multitude of roles.

Structured products may promise a return on your investment as well as hedge against risk of loss. An ETF is another example of an investment which is a fund composed of shares from a common sharemarket index.

Once you have decided which products are right for you, you must consider their risks and characteristics. For example, if you notice a term deposit has an attractive interest rate, you may be surprised to be charged a large fee to access your money before the term ends. Your ETF might actually perform worse than its index after fees and brokerage have been accounted for.

A PDS or product disclosure statement is required reading when entering a new financial product and by law an FSP must provide you with one. This is the same whether you are simply opening a bank account or investing large amounts of money in a high-risk investment scheme.

Reading these articles and  watching the Key Money Concepts videos should help you to make informed decisions about FSPs and their products.

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