Types of Financial Instruments

Types of Financial Instruments

1. Equity Instruments...

1. Equity Instruments

Equity instruments are those instruments that represent ownership of the instrument holder in the company. It entitles the holder to a share of the company’s profit through a dividend. These instruments are highly liquid, i.e., they can be easily converted into cash. Equity instruments include shares (equity shares and preference shares), share warrants, convertible securities, and rights issues to existing shareholders....

2. Debt Instruments

Debt is the borrowed capital of the company. It can be classified into short-term borrowing or long-term borrowing. Debt instruments represent the loan or obligations of the borrower who is required to pay the principal amount to the lender according to the terms of the agreement. Generally, debt instruments carry an interest rate, that is required to be paid on the maturity with the principal amount by the borrower. Debt instruments include debentures, bonds, bills payable, bank loans, mortgages, etc....

3. Derivatives

Derivatives derive their value from the underlying asset. These underlying assets can be stocks, bonds, commodities, and even intangible assets. These are primarily used for hedging against risks, speculating on price movements, and gaining exposure to different markets. Derivatives can be of different types such as options, futures, swaps, forwards, caps, floors, collars, etc. Each type has unique characteristics and purposes....

4. Money Market Instruments

Money market instruments are short-term debt securities having a maximum maturity period of one year. These instruments provide liquidity and have high credit quality. They are commonly used by governments, financial institutions, and corporations for short-term borrowing. It helps in providing short-term funding to companies. Money market instruments include treasury bills, commercial papers, certificates of deposits and a few other documents....

5. Foreign Exchange Instruments

Foreign exchange instruments (Forex) are financial instruments used for trading currencies in the global foreign exchange market. This market is decentralized and operates 24 hours a day, five days a week, allowing participants to trade and speculate on currencies. Foreign exchange instruments are also used in arbitrating and hedging of the funds. These instruments include spot delivery, future and options, swaps, etc....

Conclusion

A company issues financial instruments to raise capital. Investors and institutions use financial instruments for investment, risk management, and speculations. These are assets investors can trade, transfer, or exchange in the financial markets. These instruments include equities, such as stocks, which signify ownership stakes in corporations and entitle holders to a portion of profits. Financial instruments can be categorized into various types based on their characteristics and features such as equity instruments, debt instruments, Foreign exchange instruments, etc....

Types of Financial Instruments – FAQs

How Many Instruments in the World?...