What Is a Financial Instrument?

Financial instruments are assets that can be traded or exchanged. Some examples of financial instrumen🧸ts include stock shares, exchange-traded funds (ETFs), bonds, certificates of deposit (CDs), mutual funds, lo🍸ans, and derivatives contracts.

Financial instruments provide an efficient flow and transfer of capital among the world’s investors. They may be assets in cash, a contractual right to deliver or receive cash or another type of fi💝nancial instrument,♕ or evidence of ownership in some entity.

Understanding Financial Instruments

Financial instruments can be real or virtual documents representing a legal agreement involving any kind of monetary value. Equity-based financial instruments represent ownership of an asset. Debt-based financial instruments represent a loan made by an investor to the owner of the asset.

澳洲幸运5开奖号码历史查询:Foreign exchange instruments comprise a third, unique type of financial instrument. Different subcategories of each instrument type exist, such as 澳洲幸运5开奖号码历史查询:preferred share equity and common share equity.

Types of Financial Instruments

Financial instruments may be divided into two types: cash instruments and derivative instruments.

Cash Instruments

• The values of cash instruments are directly influenced and determined by the markets and can be readily brought and sold. Stocks and bonds are examples of such 澳洲幸运5开奖号码历史查询:primary instruments.
• Cash instruments may also be deposits and loans agreed upon by borrowers and lenders. Checks are an example of a cash instrument because they transmit payment from one bank account to another.

Derivative Instruments

• The value and characteristics of 澳洲幸运5开奖号码历史查询:derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices.
• An equity options contract—such as a 澳洲幸运5开奖号码历史查询:call option on a particular stock, for example—is a derivative because it derives its value from the underlying shares. The call option gives the right, but not the obligation, to buy shares of the stock at a specified price and by a certain date. As the price of the underlying stock rises and falls, so does the value of the option, although not necessarily by the same percentage.
• There are over-the-counter (OTC) derivatives and exchange-traded derivatives. OTC is a market or process where securities not listed on formal exchanges are priced and traded.

Types of Asset Classes of Financial Instruments

Financial instruments may also be divided according to an 澳洲幸运5开奖号码历史查询:asset class, which depends oಞn wheth🌳er they are debt-based or equity-based.

Debt-Based Financial Instruments

Debt-based instruments are essentially loans m꧑ade by an investor to the issuer in return for a payment of interest.

Short-term debt-based financial instruments last for one year or less. Securities of this kind come in the form of Treasury bills (T-bills) and 澳洲幸运5开奖号码历史查询:commercial paper. Bank deposits and certi🐻ficates of 🥀deposit (CDs) are technically debt-based instruments because they earn interest payments.

澳洲幸运5开奖号码历史查询:Exchange-traded derivatives are traded for short-term, debt-based financial instruments such as short-dated interest rate futures. There also are 澳洲幸运5开奖号码历史查询:OTC derivatives such as 澳洲幸运5开奖号码历史查询:forward rate agreements.

Long-Term Debt Instruments

🍌 Long-term debt-based financial instruments last for more than a year.

Long-term debt securities are typically issued as bonds or 澳洲幸运5开奖号码历史查询:mortgage-backed securities. Exchange-traded derivatives on these instruments are traded as fixed-income futur🌱es and options.

OTC derivatives on long-term debts include 澳洲幸运5开奖号码历史查询:interest rate swaps, interest rate caps and floors, and long-dated i🐷nterest rate oꦺptions.

Equity-Based Financial Instruments

Equity-based instruments repres✨ent ownership of an asset.

Stocks are equity-based instru൲ments, as are ETFs and mutual funds that are i🐷nvested in stocks.

Exchange-traded derivatives in this category include 澳洲幸运5开奖号码历史查询:stock options and equity futures.

Foreign Exchange Instruments

澳洲幸运5开奖号码历史查询:Foreign exchange instruments include derivativesᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ such as forwards, futures, optioꦅns on currency pairs, and contracts for difference.

Currency swaps are another common form of forex instrument.

In addition, forex traders may engage in spot tran💎sactions for the im🍬mediate conversion of one currency into another.

The Bottom Line

A financial instrument is effectively a monetary contract (real or virtual) that confers a right or claim against some counterparty in the form of a payment (checks, 澳洲幸运5开奖号码历史查询:bearer instruments), equity ownership or dividends (stocks)𒅌, debt (bonds, loans, deposit accounts), currency (forex), or derivatives (futures, forwards, op🦩tions, and swaps).

Financial instruments can be categorized by asset class and as cash-based, securities, or derivatives. Depending on their ꦐtype, financial instruments may be exchangeable on listed or over-the-counter markets.