Financial Instruments at a glance
“Financial instruments” refers to tradable assets that represent a legal agreement or contract between parties. These instruments can be used for various purposes, such as investment, hedging, or speculation. Financial instruments are contracts or documents that act as a financial asset to one organisation and a liability to another. The types of financial instruments are debentures and bonds, receivables, cash deposits, bank balances, swaps, caps, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, and more.There are many different types of financial instruments, including:
- Stocks: Stocks are an investment in a company and that company’s profits/losses. Investors buy stock to earn a return on their investment. Shares is practically ownership in company and may be profit or losses. Shares of ownership in a company that are traded on a stock exchange.
- Bonds: Debt securities issued by governments or corporations that pay interest to investors. Bonds are fixed tenure debt instruments issued to finance specific projects by the issuer. The interest (based on coupon rate) is paid in pre-defined installments to the bondholder until maturity. Bond prices are inversely proportional to market interest rates and dependent on various factors such as the credibility of the issuer, maturity, and interest rates in the market.
- Options: Contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and time. They are a form of derivative financial instrument in which two parties contractually agree to transact an asset at a specified price before a future date.
- Futures: Contracts that obligate parties to buy or sell an underlying asset at a predetermined price and time in the future.
- Exchange-traded funds (ETFs): Investment funds that are traded on stock exchanges and hold a basket of securities.
- Mutual funds: Investment funds that pool money from many investors to purchase a diversified portfolio of securities.
- Derivatives: Financial instruments that derive their value from an underlying asset or reference rate.
- Foreign exchange (FX) instruments: Financial instruments used to trade currencies, such as spot and forward contracts.
- Commodities: Physical goods, such as oil, gold, and wheat, that are traded on exchanges.
- Real estate investment trusts (REITs): Investment vehicles that hold and manage real estate assets, such as office buildings or apartment complexes, and pay out a portion of the income generated to investors.
This article will give you a brief knowledge of financial instruments available in market. We will come up with detailed version later. For more depth Financial Instruments Explained: Types and Asset Classes