A financial product is a broad term for any facility or instrument that a person can use to invest, save, borrow, or manage financial risk. They are essential tools used to move money around and can be issued by banks, governments, or companies.
In essence, a financial product serves one of three main purposes:
- To make a financial investment: This is where you give money to someone else with the expectation that it will generate a financial return or a benefit for you.
- To manage financial risk: This involves protecting yourself against potential financial loss.
- To make non-cash payments: This refers to facilities that allow you to transfer money without using physical currency.
A person in Australia has a wide range of financial products they can invest in, each with different levels of risk and potential returns. Here is a summary of some of the most common options:
- Shares
Shares, also known as equities, represent a small unit of ownership in a company. When you buy a share, you become a part-owner of that company. You can make money from shares in two ways:- Capital Gains: The share price increases, and you sell it for more than you paid.
- Dividends: The company pays out a portion of its profits to shareholders.
You can buy and sell shares of companies listed on the Australian Securities Exchange (ASX) through a stockbroker.
- Exchange Traded Funds (ETFs)
ETFs are a popular option, particularly for beginners, because they provide instant diversification. An ETF is a type of managed fund that tracks a specific index or a basket of assets, such as the top 200 companies on the ASX. Instead of buying individual shares in many different companies, you can buy one unit of an ETF and get exposure to all of them. They are traded on the stock exchange just like regular shares. - Managed Funds
Managed funds pool money from many investors and use it to buy a diverse portfolio of assets like shares, property, or bonds. The fund is managed by a professional fund manager who makes the investment decisions on your behalf. There are many different types of managed funds, each with its own investment strategy and risk level. - Bonds and Fixed Income
Bonds are a type of fixed-income investment where you lend money to a government or a corporation. In return, the issuer agrees to pay you regular interest payments over a set period of time, and then repay the original amount at a predetermined date. Bonds are generally considered a lower-risk investment compared to shares, as they provide a more stable and predictable return. - Superannuation
In Australia, Superannuation is a system designed to help you save for retirement. Employers are required to contribute a percentage of an employee’s salary into a superannuation fund. You can choose how your super is invested, with options ranging from high-growth (more in shares) to conservative (more in cash and bonds). Your super is a long-term, tax-advantaged investment. - Property
This is a common investment for Australians. Investing in property can involve buying a physical home or apartment to rent out for income and/or to sell later for a profit. Property can be a more expensive and less liquid investment than others, but for many, it’s a way to earn both rental income and potential capital growth. - Cash
While not a high-growth investment, holding cash in a high-interest savings account or a term deposit is a low-risk option. It provides a safe place for your money and allows it to earn a small, steady return. Term deposits lock your money away for a fixed period in exchange for a guaranteed interest rate.