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What are Financial Products?

11 11 2016

Learn more about what financial products are and the different real estate opportunities Woodbridge Wealth offers our client to diversify their portfolio.
Modern financial planning offers unprecedented flexibility and variety. But with the diverse breadth of financial products available, putting it all together can seem like an unsolvable puzzle.

Definition of Financial Products & Examples

If you're wondering "what are financial products?" you're not alone. It's a common term that refers to a wide variety of investments tailored to produce a given outcome on a specified schedule. A "financial product" is any instrument that helps you save and invest. Put simply, a financial product helps you grow your wealth. They're usually issued by banks, financial institutions, brokerages, insurance providers or even government agencies. Some examples might sound familiar - stocks, bonds, treasury bills, mutual funds. While some may be a bit more complicated like a credit default swap. Either way, there are no "certainties," though some financial products are more safe and more secure than others.

Here's some of the options you have

  • Stocks: These represent a share in the ownership of a company. The price of that share increases or decreases with how well the company performs. By investing in a particular company, you're aligning your success with the company's success.

  • Bonds: Bonds have a fixed interest rate and are issued by the government or companies hoping to fund a particular expense or project. Because of the fixed interest rate, bonds have a lower risk than stocks. The principle you invest is recovered at the time of the bond's term-length.

  • Treasury Bills: These instruments are issued by the government. Much like bonds, they're fixed. Your profit depends on the difference between the maturity value at the end of the term and the price that the bill was issued.

  • Mutual Funds: A professionally managed tool that buys shares in a diverse set of companies, bonds, and other government securities. Because they're professionally managed and invested in a diverse set of financial products, they are considered lower risk. Any losses are spread across the investments.

    Choosing the Right Financial Product for You: Options & Their Risk

    One of the most significant factors to consider when choosing financial products is your risk appetite. Risky investments are usually associated with higher returns than safer investments. According to empirical data, shares usually outperform all other investments over the long term. However, in the short term, shares can be extremely risky due to their random and volatile nature.

    But there are alternative options out there as well:

    For More Diversification

    Looking for diversity through real estate? Real Estate Investment Trusts (REITs) are similar to mutual funds, and combine the investments of many to purchase commercial real estate or provide financing for commercial borrowers. They allow for diversification across a range of properties, sectors, industries, and geographies, which spreads out the risk. REITs require longer terms, but typically achieve higher returns than stocks. They are traded on the major exchanges and can be bought and sold like stocks, which can result in higher expenses. And they are legally required to pay out 90 percent of profits in the form of dividends to investors, which puts REITs in the high-yield category. If you want an even lower-risk opportunity to diversify through real estate, you can buy a mutual or exchange traded fund that invests in REITs for an added layer of protection.

    For Retirement Planning

    Looking for another income stream for retirement? Treasury Inflation-Protected Securities (TIPS) are a steady choice. TIPS are treasury securities back by the government that are indexed to inflation to protect investors from the negative effects of inflation. Your principal grows with inflation which is measured by the Consumer Price Index (CPI), while you earn interest at a fixed rate paid semi-annually. TIPS can be held with an investment as low as $100 for terms of 5, 10, and 30 years.

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