Financial products are classified into three main categories depending upon their inherent function from the investor's perspective. As a result of investing in one of the available types of financial products, an investor either becomes an owner, a creditor, or gains the right to purchase or sell a product. Some of the more popular financial products include shares, bonds, investment funds, warrants and options.
Shares, which are usually thought of as stock, represent ownership in a company. They are typically offered on public trading markets in exchange for a certain monetary value. Investors pay the specified price for an amount of shares in hopes that the value will increase over time. The company selling the shares receives the funds it needs to keep its operations afloat. Shares can also earn dividend income, which represents a portion of the issuing company's profits that are returned to its shareholders.
Bonds are financial products that represent a debt that the issuing company owes to its investors. Unlike shares, the investor does not have an ownership claim. This type of investment typically has a lower yield or return than shares do, but it also carries less risk. Investors exchange cash which is paid back by the company at a certain future date, along with interest.
If an investor wishes to liquidate his bonds prior to the date that they are scheduled to mature, he may sell them back. The value of the bond will most likely not have reached its face value, which represents the amount that is scheduled to be paid back at maturity. The investor will receive the market value of the bond, which may be less or more than he originally paid for it. Private companies and the government both sell bonds to the general public.
Investment funds are financial products that may consist of money market, equity or bond funds. They do not usually invest in one particular company or source. These funds use pooled sources of cash to purchase a variety of stocks, bonds or very low-risk investments in order to diversify and reduce risk. Depending upon an investor's financial goals, investment funds might range from high risk international shares to stable bonds with a low rate of return similar to a savings account.
Warrants and options both consist of the option to buy and the option to sell a financial product. The investor does not acquire ownership or creditor status. Options are the privilege to buy or sell stock at a certain price, whereas warrants are the privilege to buy or sell bonds. The premise behind these types of investments is referred to as hedging, which is the hope that the market value of the stock or bond will change in the way the investor predicts.