Financial product

Under financial product (including financial assets , financial instrument or investment product ) are understood in finance products , which one investor in cash or capital investment ( investment act).

etymology

The business economist Erich Gutenberg rejected the application of the term production to services , whereby the doctrine solidified until 1969 that material goods are produced and services are "provided". It can be assumed that he wanted to limit his object of knowledge , but did not consciously deny the production process of services. Nassau William Senior already spoke in 1854 of the fact that products are divided into services and goods ( English "products are devided into services and commodities " ). The specialist banking literature apparently transferred production management knowledge to banking operations for the first time in 1969 and from then on spoke of bank production and its result, bank products . As a result, the term financial products became increasingly popular, particularly in the deposit business of credit institutions .

General

A financial product contains the central elements of interest / profit / income , term and currency , which are first isolated and then combined in such a way that a financial product is created that bundles certain performance features. Financial products have - in different weights - the financial functions of liquidity insurance, wealth creation and risk insurance . Their weighting in a financial product depends on the investor's liquidity, income and risk expectations. These risk concepts are expressed in risk classes .

As financial products, all types of investments in coming to banks , insurance companies , building societies , credit card companies, investment companies , leasing - or factoring companies or shadow banks in question. As recently as 1985, authors found it misleading to view insurance as a product, but it is common today to refer to insurance as a financial product. Investors are consumers , companies (especially banks), institutional investors as well as legal entities of public law in question.

As a legally binding promise to pay, a financial product includes not only the specification of payments over a certain period of time but also other rights and obligations to secure these payments. The subject of the contract is the exchange of current or future liquidity . Financial products are nominal goods that consumers, companies or legal entities under public law purchase from a financial intermediary . There is no such thing as a perfect financial product that meets the needs of all investors equally. The expectations of the individual investors in terms of the properties of an investment product in terms of liquidity, duration or risk are too different. Financial products are suitable - to varying degrees - for arbitrage , speculation or hedging .

Legal issues

Germany

Financial product is a legal term , but there is no legal definition for it . According to a Bundestag printed paper from September 2015, financial products are to be understood as investment opportunities for financial investments. Financial services are to be distinguished from this. In addition to financial products, the latter term includes banking transactions performed by credit institutions within the meaning of Section 1 (1a) KWG , but is not limited to this. It also records insurance benefits (such as insurance policies ).

In Section 492a (1) of the German Civil Code , the financial product is elevated to a legal term. This legal norm prohibits tied transactions related to the consumer real estate loan contract . A tied transaction exists when the consumer real estate loan contract can only be concluded in a package together with another separate financial product or financial service and not separately. As a legal term, financial products are all "products that enable financial investments". In Section 504a of the German Civil Code, credit institutions have to offer a more cost-effective financial product for account overdrafts under certain conditions.

EU law

In EU law , both of financial services and financial products mentioned. "Financial service is any banking service as well as any service in connection with the granting of credit, insurance, pension provision for individuals, investment or payment". The 2007 financial crisis made it clear that retail and non-professional investors often did not understand the complexity of the financial products in which they invested. Retail investors should receive the information they need to make an informed investment decision and compare different financial products. Art. 5 (1) Regulation (EU) No. 1286/2014 of November 26, 2014 (“PRIIP Regulation”) stipulates that a key information sheet must be kept available for most financial products. It must be precise, honest and clear, must not be misleading and not exceed 3 pages in A4 format (Art. 6 PRIIP regulation). Behind the bulky abbreviation PRIIP ( English Packaged Retail and insurance-based investment products ) hidden assets in packaged form which are subject to investment risk. This essentially includes

structured financial products : such as warrants that are packaged in insurance , securities or banking products ,
Financial products whose value is derived from reference values such as shares or exchange rates ( derivatives ),
closed and open investment funds,
Insurance products with an investment character, such as capital-forming and unit-linked life insurance and hybrid products, as well
Instruments issued by special purpose vehicles.

The scope is deliberately broad in order to do justice to the heterogeneity of financial products in the EU member states . This prevents providers from circumventing the regulation, for example by choosing a certain legal form , name or purpose for the financial product.

species

The type of financial products can be classified according to their (typical) provider as follows:

Credit institutions / building societies
- Sight deposits (on current accounts or call money accounts )
- Time deposit , fixed deposit

Insurance deposits

Funds

open-ended investment funds ( equity , bond and mixed securities funds ),

closed-end mutual funds

alternative mutual funds

Non-banking companies

States and subordinate local authorities

Special purpose vehicles

Raw materials ( commodities )

Precious metals ( gold , silver , platinum and palladium )
Precious wood , precious stones

property

Art and rarities

Postage stamps , paintings , carpets , antiques
Fine alcohols: whiskeys , wines , cognacs

Others

Investment clubs

Most financial products are offered by credit institutions, with financial innovations constantly leading to new products or modifications to existing products.

Structured financial products represent a special type . A financial product becomes a structured financial product when it is combined with a derivative . Structured financial products according to Art. 2 Para. 1 No. 28 of the European Parliament and of the Council of May 15, 2014 on markets for financial instruments are “securities that are used to secure and transfer the credit risk associated with a pool of financial assets and which entitle the security holder to receive regular payments that depend on the cash flow of the underlying assets . "

If one subdivides the financial products according to certain investment goals, one can distinguish as follows:

Ethical investment : responsibility, but also the conviction that such investments are more successful in the long term;
Diversification : improving security through diversification (see risk diversification );
Risk class : high return , but at the same time high risk versus high security but low return;
Value investing : Strategy that seeks medium returns with high security .

Art, valuables, rarities

Advert for the breeding of noble fur animals as an investment (1933)

Valuables with lasting utility or material value secure at least this portion of the value, minus possible storage costs . In addition, art objects in particular have an art value that results from the appreciation of the market participants . Expectations of profit for art and antiques are therefore usually speculations on rising prices as a result of higher appreciation by market participants, for example in expectation of further price increases. Accordingly, there is an almost complete risk of loss, which is most likely low when the value has slowly increased to a moderate level over centuries, the work of art marks the beginning of a significant, recognized new art direction / production method, no or few comparable pieces exist, the work of art represents a high material or utility value and was clearly manufactured with a high degree of craftsmanship and increasing interest is to be expected. Prices for works of art depend very much on the "market value" of the artist. If you want to realize profits, you usually have to plan a long-term sale in order to find a buyer. Suitable auctions only take place on certain dates. Insurance premiums , transport costs and costs for buying and selling, especially commissions from auction houses, reduce the net proceeds.

Rarities are items that are produced in limited editions from the outset and have a certain symbolic value due to their design or brand, which can increase in value, but mostly only if they remain unused ( polished record ). Or they are items that are considered rare within a popular collection area or are in an unusually good state of preservation for their age. Risks and costs are similar to those mentioned for art, here too there is the danger of being offered something as a “real rarity” for which there is no excess demand on the market and is not to be expected. For traders who typically search inexpensive sources (flea markets, auctions, clearing out) for correspondingly high-quality objects and offer them at collectors' exchanges with a wealthy public, this is not a financial investment, but a commercial object in which the arbitrage makes up the profit.

risk

An overall risk indicator is intended to provide the investor with information about three main investment risks:

Market risk : the development of the market value of a financial product in the future,
Credit risk : the default risk of the financial product issuer and
Liquidity risk : the risk that a financial product can no longer be traded and therefore can no longer be redeemed .

Every single risk can lead to a total loss of the capital invested . These investment risks can also occur cumulatively and mutually reinforce one another. On a scale from 1 to 7 (1 = low risk, 4 = medium risk, 7 = highest risk), the Federal Financial Supervisory Authority (BaFin) suggests a simple grading of these 3 investment risks. Credit institutions work with tiered asset classes . If financial products are bought or sold through investment advice from banks or financial services institutions , or if a hold recommendation is made, the investor must be provided with a written declaration of suitability prior to submitting the securities order, which explains all risks and certifies that the investor is aware of the risk, in accordance with Section 64 (4) WpHG risk setting for this is the correct risk class has.

In February 2013, Sven Giegold initiated an online vote among 2,000 participants to identify the most dangerous financial products. Then 46.8% of the participants in the category “Products that harm consumers or investors” voted for credit default swaps on government bonds from emerging countries . This was followed, with 22.4% of the votes, by foreign currency loans with a bullet repayment vehicle , credit cards with excessive interest rates (21.2%) and reverse convertibles (9.6%). In April 2016, BaFin published an Internet search on violations of advertising regulations for financial products, according to which provisions of the Asset Investment Act (VermAnlG), the Securities Prospectus Act (WpPG), the Securities Trading Act (WpHG) and the Capital Investment Code (KAGB) were partially violated. In total, it identified 74 violations in over 170 advertisements , most of which were committed by non- regulated companies.

Factors

The magic triangle of investments lists three factors that compete with each other in financial products, i.e. they cannot all be fulfilled at the same time:

Security : The investment should be as safe as possible, i.e. fluctuations in value and the probability of losing the capital invested should be minimized.
Return : The investment should generate the highest possible return within a certain period.
Liquidity : It should be possible to convert the investment back into money (i.e. generally: sell) as quickly as possible (see also fungibility ).

Additional factors are

Responsibility : The investment should comply with ethical aspects, e.g. B. pursue ecological or social goals or at least not finance any activities rejected by the investor (e.g. child labor, armaments).
Taxation : For individual investors, the after-tax return is crucial because capital gains income tax are obligatory ( capital gains tax ). Until 2009, for example, dividends were subject to the half-income method , while exchange rate gains during the speculation period or interest income were fully taxable.

Demarcation

The terms production and product originally come from business administration , where they are used for the production of real goods and the result of this production. The bank management apprenticeship began in the 1970s with the adaptation of the production and product terms for the creation of banking services. In the course of increasing use, the term financial product also came up.

The terms financial product and financial contract are sometimes used synonymously in the specialist literature ; Klaus Spremann speaks technically of financial contracts. The term financial contract is derived from the contractual relationship, the term financial product, on the other hand, from the product itself. Financial instrument is the - not identical - term in accounting according to IFRS (IAS 32.11 and 39.8) and in the WpHG . According to Section 2 (4) of the WpHG, financial instruments are securities, investment units, money market instruments, derivatives (this refers to futures transactions ), rights to subscribe for securities and investments (with the exception of shares in cooperatives ) and registered bonds from credit institutions. According to IAS 39.8, a financial instrument is a contract “which simultaneously leads to a financial asset for one company and a financial liability or an equity instrument for another company”.