Financial product – What is it, definition and concept | 2022

A financial product is an instrument that allows you to invest, save or finance goods and services and that adapts to the characteristics of the investor’s profile in relation to its profitability and risk.

Therefore, we are facing a series of products that, unlike those that we can buy in a store, are related to finance. In reality, the financial entities that market them carry out the same process as in any company.

In fact, we are interested in a type of financial product and request it. The entity analyzes our profile and on this basis recommends the one that best suits our personality, conservative (lower risk) or not (higher risk) and sells it to us.

Types of financial product

Let’s see how we could classify these products, depending on whether they focus on savings, investment or financing. At the end we will see some examples:

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  • Within those that focus on savings, we have all those that serve so that we can accumulate certain amounts of money with a view to constituting an amount in the future, that is, a monetary cushion.
  • In relation to investment products, an ideal relationship between return and risk is sought. Thus, they are those that offer interest, dividends or capital gains. The latter are due to the differences between the purchase and sale prices.
  • Lastly, there would be financing. In them, the contracting entity lends us money in exchange for interest and with certain guarantees.
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The risk

The risk can be looked at, from a statistical point of view, as the deviation of the data from its average value. The higher this, the greater the risk of that financial product. In plain words, it is the probability that the return, interest or earnings will go down or up.

It is very important to take both aspects into account. Thus, in an investment product the fear will be that the profit will go down, but in a financing product (at variable rates) what we do not want is for that differential to rise.

On the other hand, the savings product has no risk, at least this is very small. In fact, in savings products the capital is usually guaranteed, if not all of it, a substantial part. In the example we will see the case of deposits.

Training and financial product

Training is essential when we talk about a financial product. Of course, we are not saying that you have to be experts, but some basic knowledge is very useful. Keep in mind that it is the entity that hires these services that will advise us.

There are careers that provide a more or less deep knowledge about them. The best known are Business Administration or Finance. In addition, there are master’s degrees or specialized courses that are recommended if you are going to dedicate yourself to advising others.

The important thing is, above all, to acquire notions related to interest rates, profitability, risk, capital gains and other concepts. For this reason, sites like Economipedia are of enormous relevance, since they teach in an entertaining and simple way.

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Example of financial product

To finish, let’s look at some examples:

  • A mortgage is a loan whose guarantee is the home it finances. We are facing a financing product with a risk that will depend on whether we contract it at fixed or variable interest. The latter is usually referenced with indicators such as the Euribor.
  • Shares of a company. In this case it would be an investment and since it is a variable income, its return can be high, but so is the risk.
  • A derivative contract. This is a complex product that consists of a contract in which we buy a financial asset whose value is referenced based on the evolution of the price of another. It is not advisable to hire it if we are not advised by an expert.
  • Personal loan. Once again we are facing a financing product similar to a mortgage, but whose interests are usually higher and the guarantee is personal.
  • State obligations. It is an investment product with low profitability and low risk. In this case, the public administration is financed.
  • Bank deposit. We leave the bank money for a while in exchange for interest and with a full guarantee of return. That yes, in this financial product, today, the interests are very low or null and the return will depend on the guarantee fund of each country.

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