How To Use Financial Products

A financial product is any of the services provided by or the financial arrangement engineered by one company or individual to another.  Financial products include, but are not limited to, securities, derivatives of securities, life insurance policies, retirement savings accounts, basic deposit products, and any interest in a managed investment scheme.

The main purpose for which individuals and institutions use financial products is to better achieve their financial goals.

An individual or institution may buy or sell a security, such as a bond or stock, in order to speculate on an investment opportunity or to earn income on an asset they own.  For example, if Mr. Smith thinks that the price of gold is going to increase and he wishes to profit from this rise, or the value of XYZ Company's products are going to be in more demand, Mr. Smith may buy stock in a gold mining company or in XYZ, respectively.

Alternatively, if Mr. Smith has $100,000 and needs $120,000 to buy a new house, he may place his money in a corporate bond that is yielding 10% a year so that he will earn approximately $10,000 per year.  After two years, Mr. Smith can purchase his house.

In both instances, Mr. Smith used financial products to try and achieve a financial goal.

Suppose Mr. Smith has $100,000 in XYZ stock.  He thinks this is going to be a good investment in the long run, but he still wants to hedge his bets.  He can do this by purchasing a put option on XYZ stock.  A put option is a type of financial product, a derivative, that will increase in value if the underlying stock performs very badly.  This way Mr. Smith is able to hold on to his investment in XYZ stock, but is afforded some protection should the unexpected happen and XYZ's stock price collapses.

Annuity contracts are one of the most common financial products in the United States.  Annuities are used to protect savings that an individual is able to accumulate early in life to provide for retirement in later years.

Similarly, property insurance is used to protect the value of one's property in the event of the unexpected.  In many states, car insurance is even required by law.

Again, in both cases these financial products are used to achieve financial goals.


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