Types of Financial Products & Definitions (Explained Simply in 2025)

Financial products are, in a nutshell, contracts that are bought and sold on a marketplace. This is a very general definition as financial products, also called financial vehicles, are diverse and come in several different forms.

The central concept behind a financial product is that it lets you convert your fiat currency into something that can be bought and sold with others on a market. When it comes to financial products, there are several possible ways to classify them.

In this article, we will divide financial products into categories based on the technical features that each product demonstrates. Keep in mind though that there may be other ways to divide and classify financial products, depending on which features of those products are relevant for your current interests. 

Under our analysis, there are 4 major types of financial products bought and sold on markets:

1. Securities
2. Derivatives,
3. Commodities
4. Currencies.

This is by no means an exhaustive list. Some financial products might not fit neatly into these categories, but this article serves as a general overview of the main ones you’ll come across. 

Securities

A security is a type of instrument that is used to directly finance companies, banks, public entities, or governments. Essentially, securities represent an entitlement to something, like an asset or a contract.

In that sense, you can kind of think of securities as a type of promise: the holder of a security is promised something proportional to the number of securities that they hold. Securities can be short-term or long-term, and the money used to purchase securities are used to directly finance various entities.

Stocks 

Stocks are probably the most common kind of security and represent a portion of ownership in a company. When you buy a stock, you are buying a piece of ownership in a company.

Generally, stock ownership also comes with company voting rights about certain issues. Since stocks represent ownership, they entitle you to a portion of the value of the entire company. Companies sell stock to individual investors to finance their operations.

Stocks can appreciate or depreciate in value, depending on market conditions. Investors primarily make money by buying stocks, waiting for them to increase in value, then selling them for profit. 

Bonds

Bonds are basically loans that an individual gives to some company, public entity, or government. Like stocks, companies sell bonds to finance operations.

However, unlike stocks, bonds do not represent a claim of ownership. Instead, bonds represent an obligation on the behalf of the issuer to pay back the loan plus interest by a specific maturation date.

Bonds are considered long-term investments and usually have long maturation dates; on the order of 20-35 years. Bond markets have less risk than stocks, but they have a consequently lower return as you mainly earn money on bonds through interest, not capital appreciation. 

Mutual Funds

Mutual funds are a special kind of financial vehicle that is made up of several people pooling their money to purchase securities.

The benefit of mutual funds is that it lets investors combine their money to buy more than they would be able to by themselves. Individuals are entitled to a portion of the fund proportional to how much they invest. 

Two popular types of mutual funds are index funds and exchange-traded funds. Index funds are bundles of securities that track a specific index (e.g. S&P 500).

ETFs are like index funds, except shares of ETFs can be bought and sold on the market, like stock. Index funds are sometimes called secondary securities as a portion of an index fund represents ownership in several securities.

Mutual funds are a bit hard to classify as they may include several different types of financial products, such as cash instruments, insurance companies’ debt, foreign exchange, shares, derivatives, and more.

Derivatives

A derivative is a type of security whose value is derived from an individual or group of individual securities.  Derivatives represent a contract between the buyer and seller, and the price of derivatives changes depending on price movements of the underlying asset (known as the benchmark).

Derivatives are commonly used to speculate on market movements or leverage their holdings. Another way to think of a derivative is that they give an investor the right to buy or sell some security at a specific price or a specific time. derivatives are usually considered to have high risk in capital markets.

Futures

A future is a type of derivative that represents an agreement between two parties to buy and sell an asset at a fixed price at a fixed date. For example, individual A can buy a future that obligates company B to sell the shares at $30 per share by date X.

If the price of the shares goes above $30 by date X, then A can sell the futures contract for a profit. Individual A is hedging their risk by ensuring they can buy shares at a specific price even if the share price rises. 

Options

Options are very similar to futures except that the holder of an option does not have an obligation to exercise that agreement.

Futures give an obligation to buy/sell but options give a right, but not the obligation to buy/sell. Options are used to hedge risk or speculate on the price movement of underlying assets, just like futures, except they are a bit more flexible.

Swaps 

A swap is another kind of derivative that is used to turn one kind of cash flow into another. For example, a commodity swap allows two people to trade cash flows based on the price of the underlying commodity.

An interest swap lets the trader convert from a fixed interest rate on a loan to a variable interest rate or the other way around. There are many different types of swaps, depending on the underlying asset class, including currency swaps and credit default swaps. 

Commodities

A commodity is a type of financial product that represents ownership or a share of some physical good or raw material.

In general, commodities trading involves things like precious metals (gold, silver, platinum) or natural resources (coal, oil, natural gas, etc) but can also include so-called ‘soft’ commodities which include agricultural products or livestock.

For example, if an investor believes that the price of gold will rise, they can invest their money in gold and potentially profit if the price of gold rises. The logic is the same behind any other kind of commodity. Oil commodities are bought and sold based on the changing price of oil and so on.

Commodities are usually included in portfolios as a hedge against inflation. Since the exact quantity of a given commodity is (generally) fixed, there is less risk of inflation, unlike with fiat currency which is in principle unlimited.

Generally, commodities trading tends to get more popular if stocks and other securities take a nosedive.

Generally speaking, it is much more difficult to directly trade commodities than it is to trade securities. However, one can indirectly invest in commodities by investing in securities of companies that process or manufacture those commodities, such as a mining company or agricultural company.

Aside from directly trading commodities, there is also a large derivative market surrounding commodities that include futures, contracts, etc. 

Currencies

Currencies are generally not considered a distinct asset class or financial product, but we are including them here, simply because currencies can be traded on a market.

Currencies are traded on foreign exchanges (or crypto exchanges), and let people convert one type of currency into another. 

Currency trading is practically a necessity as different countries and entities from different nations need to trade with one another.

An interesting feature of currency trading is that there is no centralised marketplace for trading, as there is for securities. That means that the majority of foreign currency transactions occur between individual investors.

Investors can make money on forex markets by trading currencies as the relative price changes.

Before the advent of the internet, currency trading was very difficult and mostly done by large banks, multinational corporations, or wealthy individuals. However, forex trading is much more accessible with the rise of online foreign exchanges.

Best Financial Products for Beginners in the UK

When you’re just starting your financial journey in the UK, choosing the right financial products can feel overwhelming. However, by focusing on beginner-friendly options that offer safety, flexibility, and growth potential, you can build a solid foundation for your future. Whether you’re looking to save for a rainy day or dip your toes into investing, there are several excellent products available that cater to various financial goals.

One of the simplest yet essential financial products for beginners is a savings account. Many UK banks and building societies offer easy-access savings accounts with competitive interest rates and minimal restrictions. A savings account is a low-risk way to store your money while earning interest, making it ideal for short-term savings goals such as building an emergency fund or saving for a holiday. Alternatively, for those who don’t need immediate access to their money, a fixed-rate savings account (also known as a fixed-term bond) offers higher interest rates in exchange for locking in your savings for a set period.

For individuals who want to start investing but prefer a hands-off approach, a Stocks and Shares Individual Savings Account (ISA) is a fantastic option. In the UK, you can invest up to £20,000 per tax year in an ISA, and any gains are completely free from income and capital gains tax. Many investment platforms offer pre-made portfolios designed for beginners, balancing risk with potential returns. You can choose from cautious, balanced, or adventurous portfolios, depending on your comfort level with market fluctuations. Another benefit of Stocks and Shares ISAs is the flexibility to invest in funds, shares, or exchange-traded funds (ETFs) while enjoying tax-free growth.

For those who prefer a lower-risk approach to investing, mutual funds and exchange-traded funds (ETFs) offer excellent diversification. By pooling money with other investors, you can spread your risk across multiple stocks, bonds, or commodities rather than investing in a single asset. Many UK-based funds, such as FTSE 100 ETFs or global equity funds, are cost-effective and easy to buy through popular investment platforms like Vanguard, Hargreaves Lansdown, or Nutmeg. Mutual funds typically have professional fund managers who select the assets on your behalf, making them an appealing choice for beginners who want to avoid managing individual stocks.

If you’re saving specifically for your first home or retirement, the Lifetime ISA (LISA) is another financial product worth considering. With a LISA, you can save up to £4,000 per tax year and receive a 25% government bonus—up to £1,000 annually. This product is particularly beneficial for first-time homebuyers or those planning for retirement, although it’s important to note that you’ll face penalties for early withdrawals unless the funds are being used for one of these approved purposes.

Finally, if you want to grow your money without the complexities of investing, consider a regular savings account offered by many UK banks. These accounts typically have higher interest rates compared to standard savings accounts but require consistent monthly deposits, encouraging disciplined saving. By starting with a combination of these beginner-friendly financial products, you can cultivate a balanced approach to managing your money while working towards your long-term financial goals.

By choosing financial products tailored to your needs—whether for saving, investing, or buying your first home—you can take control of your finances and make steady progress toward a more secure future. Whether you’re opening your first savings account or venturing into investments with a Stocks and Shares ISA, understanding these beginner options will give you the confidence to grow your wealth over time.

Looking for more? Ok, let’s get into the nitty-gritty.

Understanding the various types of financial products available can seem overwhelming, but breaking them down into simpler terms can help demystify the financial world. This comprehensive guide will explain different financial products, their purposes, and how they can benefit you. Whether you’re new to finance or looking to expand your knowledge, this article will provide clear and concise explanations of key financial products.

1. Banking Products

Savings Accounts

A savings account is a basic financial product offered by banks and credit unions. It allows you to deposit money, keep it safe, and earn interest. Savings accounts are ideal for short-term savings goals and emergency funds.

• Features: Low interest rates, easy access to funds, and safety of principal.
• Benefits: Encourages saving, earns interest, and provides liquidity.

For more information, visit the Money Advice Service Savings Account Guide.

Checking Accounts

A checking account is used for day-to-day transactions. It allows you to deposit money, write checks, and use a debit card to make purchases or withdraw cash.

• Features: No interest or very low interest, high liquidity, and often includes a debit card and check-writing privileges.
• Benefits: Convenient for daily transactions, bill payments, and direct deposits.

Learn more at the Which? Checking Accounts Guide.

Certificates of Deposit (CDs)

A Certificate of Deposit (CD) is a time deposit offered by banks. You commit to leaving your money in the account for a fixed term, and in return, you earn a higher interest rate than a regular savings account.

• Features: Fixed interest rate, fixed term, and penalty for early withdrawal.
• Benefits: Higher interest rates, predictable returns, and safety of principal.

For detailed information, visit the Investopedia CD Guide.

2. Credit Products

Credit Cards

A credit card allows you to borrow money from a bank to make purchases. You are required to pay back the borrowed amount plus any interest.

• Features: Revolving credit, interest rates, and credit limits.
• Benefits: Convenience, building credit history, and reward programs.

For more details, check the MoneySuperMarket Credit Card Guide.

Personal Loans

A personal loan is a fixed amount of money borrowed from a bank or lender, which is repaid in fixed monthly installments over a set period.

• Features: Fixed interest rates, fixed repayment terms, and no collateral required.
• Benefits: Flexibility in use, lower interest rates than credit cards, and predictable payments.

Learn more at the NerdWallet Personal Loans Guide.

Mortgages

A mortgage is a loan specifically for purchasing a home. The property itself serves as collateral for the loan.

• Features: Long-term repayment periods, fixed or variable interest rates, and large loan amounts.
• Benefits: Enables home ownership, potential tax benefits, and equity building.

For comprehensive information, visit the GOV.UK Mortgage Guide.

3. Investment Products

Stocks

Stocks represent ownership shares in a company. When you buy stocks, you become a part-owner of the company and can benefit from its growth and profitability.

• Features: Potential for capital gains, dividends, and market volatility.
• Benefits: Growth potential, dividend income, and liquidity.

For more insights, visit the Investopedia Stocks Guide.

Bonds

Bonds are debt securities issued by governments or corporations to raise capital. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity.

• Features: Fixed interest payments, fixed maturity dates, and lower risk than stocks.
• Benefits: Predictable income, capital preservation, and diversification.

Learn more at the Investopedia Bonds Guide.

Mutual Funds

A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. It is managed by a professional fund manager.

• Features: Diversification, professional management, and various types (equity, debt, balanced).
• Benefits: Reduced risk through diversification, professional management, and accessibility.

For detailed information, visit the Morningstar Mutual Funds Guide.

Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They track the performance of a specific index, sector, or commodity.

• Features: Diversification, traded like stocks, and lower fees than mutual funds.
• Benefits: Flexibility, cost-efficiency, and diversification.

Learn more at the Investopedia ETFs Guide.

Real Estate Investment Trusts (REITs)

REITs are companies that own, operate, or finance income-producing real estate. Investors can buy shares of REITs on major stock exchanges.

• Features: Dividend income, exposure to real estate, and liquidity.
• Benefits: Regular income, diversification, and potential for capital appreciation.

For more information, visit the Nareit REIT Guide.

4. Insurance Products

Life Insurance

Life insurance provides financial protection to your beneficiaries in the event of your death. There are two main types: term life insurance and whole life insurance.

• Features: Death benefit, policy term, and premiums.
• Benefits: Financial security for loved ones, estate planning, and peace of mind.

Learn more at the Money Advice Service Life Insurance Guide.

Health Insurance

Health insurance covers medical expenses, including doctor visits, hospital stays, and prescription drugs. It can be provided by employers or purchased individually.

• Features: Premiums, deductibles, co-pays, and coverage limits.
• Benefits: Access to healthcare, financial protection, and preventive care.

For detailed information, visit the NHS Health Insurance Guide.

Auto Insurance

Auto insurance provides financial protection against losses resulting from traffic accidents, theft, and other vehicle-related incidents. It is typically required by law.

• Features: Liability coverage, collision coverage, and comprehensive coverage.
• Benefits: Legal compliance, financial protection, and peace of mind.

Learn more at the MoneySuperMarket Auto Insurance Guide.

Home Insurance

Home insurance covers your home and personal property against damage or loss from events like fire, theft, and natural disasters. It also provides liability coverage.

• Features: Property coverage, liability coverage, and premiums.
• Benefits: Financial protection, peace of mind, and mortgage requirement compliance.

For comprehensive information, visit the Which? Home Insurance Guide.

5. Retirement Products

Individual Savings Accounts (ISAs)

ISAs are tax-advantaged savings accounts available in the UK. There are several types, including Cash ISAs, Stocks & Shares ISAs, and Lifetime ISAs.

• Features: Tax-free interest or investment returns, annual contribution limits, and flexibility.
• Benefits: Tax efficiency, flexibility, and long-term savings growth.

Learn more at the GOV.UK ISAs Guide.

Pensions

Pensions are retirement savings plans that provide income in retirement. There are several types, including State Pensions, Workplace Pensions, and Personal Pensions.

• Features: Tax relief on contributions, long-term savings, and employer contributions (for Workplace Pensions).
• Benefits: Financial security in retirement, tax advantages, and potential employer contributions.

For more information, visit the Money Advice Service Pensions Guide.

Annuities

An annuity is a financial product that provides a steady income stream, typically for life, in exchange for a lump sum payment or series of payments.

• Features: Regular income, fixed or variable payments, and longevity risk protection.
• Benefits: Guaranteed income, financial security, and peace of mind.

Learn more at the Investopedia Annuities Guide.

6. Specialised Financial Products

Student Loans

Student loans are used to finance education expenses. They can be provided by the government or private lenders and are typically repaid after graduation.

• Features: Fixed or variable interest rates, deferred repayment, and income-based repayment options.
• Benefits: Access to education, deferred payments, and flexible repayment options.

For detailed information, visit the GOV.UK Student Finance Guide.

Business Loans

Business loans provide funding for business operations, expansion, or startup costs. They can be secured or unsecured and come from banks, credit unions, or alternative lenders.

Leading Financial Products for 2025 in the UK

As we step into 2025, financial products in the UK are evolving to meet the changing economic landscape and consumer demands. Whether you’re looking to save, invest, or protect your assets, there are several standout options designed to help you achieve your financial goals. A Cash ISA (Individual Savings Account) remains one of the most popular choices for those seeking tax-efficient savings. With interest rates expected to remain competitive, many providers offer flexible ISAs that allow withdrawals without losing tax benefits. Additionally, the £20,000 annual ISA allowance ensures that you can grow your savings tax-free, making it an essential product for savers looking to maximise their returns in 2025.

For those keen to build long-term wealth, Stocks and Shares ISAs continue to lead the way in investment products. Platforms such as Vanguard, Nutmeg, and Hargreaves Lansdown have introduced simplified portfolios tailored to different risk appetites, making investing more accessible than ever. With a strong focus on sustainable investing in 2025, many providers now offer ESG (Environmental, Social, and Governance) funds within their Stocks and Shares ISAs. These funds appeal to investors who want to generate returns while supporting ethical companies. Additionally, ETFs (exchange-traded funds) tracking global indices and specific sectors such as technology or clean energy are expected to remain top picks due to their low fees and diversification benefits.

For prospective homeowners, the Lifetime ISA (LISA) remains a powerful tool in 2025 for those saving for a deposit on their first home. With the government continuing to offer a 25% annual bonus on contributions of up to £4,000 per year, you can earn up to £1,000 in free money annually. Combined with rising house prices, the LISA has become a crucial financial product for younger buyers aiming to get on the property ladder. However, it’s important to plan your savings carefully, as early withdrawals for non-home or non-retirement purposes will incur a penalty. For those looking to benefit from flexible saving options, Regular Savings Accounts offered by major UK banks like Lloyds, Nationwide, and Santander also continue to offer appealing interest rates, encouraging consistent, disciplined saving.

Finally, Green Bonds and Social Impact Investments are emerging as key financial products for 2025 as more investors look to align their portfolios with environmental and social goals. The UK government and private institutions are expanding their offerings of green bonds that support renewable energy and infrastructure projects. For those prioritising low-risk investments, Premium Bonds remain a top choice, with NS&I continuing to adjust prize rates to remain competitive. By blending traditional savings products with forward-thinking investment opportunities, UK consumers in 2025 can build well-rounded portfolios that cater to their financial aspirations while contributing to a more sustainable future.

With these leading financial products, you can take advantage of tax-efficient savings, robust investment options, and ethical finance trends, empowering you to make informed decisions and grow your wealth confidently throughout 2025.

Final Thoughts

A financial instrument is a useful concept to have a grasp over. Virtually every aspect of the economy depends on the assets and contracts that financial products carry.

All financial products hold risks, so it is up to the individual investor to determine the kinds of financial and cash instruments and products. In the trading industry, it is important to understand these instruments for navigation in the stock market.

When investing and trading your money in the economy, there is always an incentive to have several sources of income through multiple investments.

Investments differ based on the kind of financial instrument they are and you need to know the relevant information about them.

References

Morningstar ETFs Overview
GOV.UK Pension Guide