The Trade Lifecycle: Behind the Scenes of the Trading Process, 2nd Edition

Chapter 3 Understanding Traded Products – Follow the Money

To gain an understanding of financial trading one must distinguish between the concept of an asset class and that of a financial product. These terms are often confused. The aim of this chapter is to define a set of common financial products. In the following chapter we discuss asset classes. A financial product (or ‘product’) is a contract between two parties which determines an exchange of money or assets. There are many specific products tailored for the needs of one or both parties, but here we will discuss a set of common products existing in the financial world with a well-defined structure.

To help remove the confusion between products and asset classes, let us consider the everyday case of buying a sack of potatoes and the less frequent purchase of a washing machine. Essentially the process of acquisition of potatoes and washing machines is the same: you spend money and receive goods. However, since the type of vendor, the layout of the store, the delivery mechanism and various other factors are different, we normally view these two acquisitions in different ways. We may say that potatoes are in the asset class of perishable food and washing machines are in the asset class of domestic appliances. So the underlying process is the same but the asset classes are different.

The same is true for financial products. Buying shares is intrinsically the same as buying aluminium, sovereign bonds or purchasing dollars ...