Financial Products, Functions & Risk
Financial Products
Financial Products are tools people use to invest or manage money. Some common types are:
1. Stocks (Equities): When you buy a stock, you’re buying a small piece of a company. If the company grows, your stock’s value can go up, and you might also get a share of the profits (dividends).
2. Bonds: Bonds are like loans you give to a company or government. They promise to pay you back with interest over time. It’s usually safer than stocks but with lower returns.
3. Derivatives: These are contracts that get their value from something else, like a stock, bond, or commodity (like oil). They’re often used to reduce risk or speculate on price changes.
4. Mutual Funds/ETFs: These are collections of stocks, bonds, or other financial products. They let you invest in many things at once without having to buy each item individually.
Functions in Finance
Different teams work together to make sure everything in the financial world runs smoothly. Some important functions are:
1. Trading: Traders buy and sell financial products like stocks or bonds. Their goal is to make a profit for their clients or the company.
2. Settlement: After a trade happens, the settlement team makes sure the buyer gets the stock (or bond), and the seller gets their money.
3. Risk Management: This team helps ensure that the company doesn’t lose too much money if things go wrong. They analyse potential risks and find ways to protect against them.
4. Middle Office: These teams support the traders by making sure trades are entered correctly and that any issues are solved quickly. They also help manage risk.
5. Back Office: They handle all the paperwork and processing behind the scenes, like ensuring trades settle and managing accounts.
6. Compliance: The compliance team ensures that all activities within the financial institution adhere to laws, regulations, and internal policies. This function is essential for maintaining the integrity of the financial system and preventing illegal activities, such as fraud or money laundering.
7. Financial Analysis: Financial analysts evaluate the financial performance of the organization and provide insights to help inform strategic decisions. They analyze financial statements, market trends, and economic data to support investment decisions and assess overall financial health.
8. Portfolio Management: Portfolio managers are responsible for managing investment portfolios on behalf of clients, which may include individuals or institutions. They make decisions on asset allocation, selection of securities, and adjustments based on market conditions to achieve desired investment outcomes.
Risk
In finance, risk is the chance of losing money. The main goal is to manage or reduce risk while making profits. There are different types of risks:
Market Risk: This is the risk that prices (stocks, bonds, etc.) will change in a way that makes you lose money.
Credit Risk: The risk that someone won’t pay back money they owe (like a loan).
Operational Risk: Mistakes or system failures can cause financial losses.
Liquidity Risk: This is when you can’t quickly buy or sell something without losing money.
In summary:
Financial Products: Tools to grow or manage your money.
Functions: Teams working to trade, settle, and manage risk.
Risk: The possibility of losing money, which companies try to control.