Financial Instruments: Definition & Examples (2024)

FAQs

What is a financial instrument and examples? ›

In simple words, any asset which holds capital and can be traded in the market is referred to as a financial instrument. Some examples of financial instruments are cheques, shares, stocks, bonds, futures, and options contracts.

A financial instrument refers to any type of asset that can be traded by investors, whether it's a tangible entity like property or a debt contract. Financial instruments can also involve packages of capital used in investment, rather than a single asset.

Common examples of financial instruments include stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), bonds, derivatives contracts (such as options, futures, and swaps), checks, certificates of deposit (CDs), bank deposits, and loans.

The two most prominent financial instruments are equities and bonds. Equities (or shares) are the ownership of a portion of a company, which can then be traded. The value of this portion may fluctuate depending on the company's performance and market conditions, making equities a potentially risky investment.

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).

The following are examples of items that are not financial instruments: intangible assets, inventories, right-of-use assets, prepaid expenses, deferred revenue, warranty obligations (IAS 32. AG10-AG11), and gold (IFRS 9. B. 1).

Financial instruments are either cash or derivative instruments. The price of cash instruments is determined by market supply and demand. These include shares, bonds and currencies. The price of derivative instruments is determined by the price of other instruments.

A financial instrument is an instrument that has monetary value or records a monetary transaction or any contract that imposes on one party a financial liability and represents to the other a financial asset or equity instrument. Stock, bonds, and options contracts are some examples of financial instruments.

What Is an Instrument? An instrument is a means by which something of value is transferred, held, or accomplished. In the field of finance, an instrument is a tradable asset, or a negotiable item, such as a security, commodity, derivative, or index, or any item that underlies a derivative.

Imagine you put some cash on a savings account. A bank has a liability to keep your funds safe and return when the contract ends. Cash deposits are a common type of financial instrument.

How are financial instruments valued? ›

In this method, the value of a financial instrument is estimated on the basis of the projected economic advantages in the form of revenue, cash flows, or cost savings created by the financial instrument, as well as the potential risks.

Financial instruments obligate one party (person, company, or government) to transfer something to another party. Financial instruments specify payment will be made at some future date. Financial instruments specify certain conditions under which a payment will be made.

Safe assets are those that allow investors to preserve capital without a high risk of potential losses. Such assets include treasuries, CDs, money market funds, and annuities. There is, of course, a risk-return tradeoff, such that safer assets typically offer comparatively lower expected returns.

Examples of these products are warrants and certificates. These products, as well as options and futures, are not suitable for the beginning investor because they are complex, volatile by nature, and risky.

Financial Instruments: Types and Functions Explained. Financial instruments are essential to the modern economy because they can be used to manage risk, raise cash, and facilitate various financial transactions.

Financial instruments are assets that can be traded or used for investment purposes. It can be broadly categorized into Equity-based (stocks, representing ownership in a company) and Debt-based (bonds, loans, representing a loan made by an investor to a borrower) securities.

A financial instrument is an agreement between two parties with monetary value. In other words, any asset that holds capital and which can be traded is a financial instrument. It is noteworthy that financial instruments can be palpable or virtual documents representing a legal agreement of any monetary value.

Stock, bonds, and options contracts are some examples of financial instruments. [Last updated in July of 2021 by the Wex Definitions Team] COMMERCE.