What are financial products?

We gain access to financial markets using financial products and instruments.

You may already be familiar with some of them. Savings, government bonds, mutual funds, individual shares and exchange-traded funds (ETFs) are all examples of financial products.

Financial products can be grouped into two main categories: complex and non-complex.

Non-complex financial products are better suited to beginner traders who don’t yet have much specialist knowledge. For example, buying and selling shares is a straightforward practice that most people can understand, so it’s considered non-complex.

You can also access the markets using complex financial products. These let you benefit from the rising or falling prices of an asset without having to own it. They’re considered complex because they aren’t likely to be understood by the average market participant, like leveraged derivatives.

For example, contracts for difference (CFDs) are complex products. They’re called derivative instruments because the value we unlock when using them is derived from the price movement of the underlying asset. And unlike the more traditional solutions like buying shares in a company, derivatives trading requires a smaller initial investment for full exposure to the market due to leverage.

Derivative products can be incredibly powerful wealth-building tools. They can amplify your returns and it generally takes less time to make a profit. However, it’s important to be aware of the risks involved in leveraged trading. While it can magnify your profits, any losses you make are amplified in the same way. Similarly, rapid market movements – or market volatility – may help you gain profits in a short amount of time, but losses can happen just as quickly.

Derivatives also allow you to protect yourself against losses from falling share prices through practices such as hedging and diversification. We’ll explore how these work later on in this course.