Basic Understanding About Financial Instruments

Financial instruments are the evidence of ownership and are a contract between two parties. This contract gives rise to financial liability to one entity and financial asset to another entity. They could either be cash (currency), contractual right to deliver or receive cash (bonds) and evidence of ownership in a particular entity (share). In recent years, the new financial instrument has come into existence known as a cryptocurrency.  The trading of these currencies is done through automated trading robot like bitcoin loophole.  Below mentioned are different kinds of financial instruments.

Different kinds of financial instruments

Equities- These are the kind of security which represents ownership in an organization.  The equities are bought and sold (traded) in the stock market. Also, the equities could be purchased through IPO (Initial Public Offering) that is directly from the organization. Investing in equities are considered as a good investment for long-term and the return for the long time horizon is much greater than the other investment options. But as the return increases, the risk of increases.

Bonds- These financial instruments are fixed in nature which is solely issued to raise capital. Both the state or central government and other institutions of government and private entities like financial institutions, companies, etc use these instruments to gather funds. Bonds that are issued by government give only fair returns but come with very low risk.

Mutual funds- Mutual fund helps people to pool their savings along with other individuals and gets it professionally managed. The funds will be invested keeping in mind pre-set investment objective. The mutual fund investment option is quite popular now because of its risk-diversification, sound regulation, cost-efficiency, and professional management. You could also invest very little amount each month in the mutual fund. Also, there are various thematic and general mutual funds one can choose from. The return and the risk possibilities vary accordingly.

Cash equivalents- These are highly liquid and relatively safe investment options. Money market funds and treasury bills are cash equivalents.

Deposits- The most common way an individual secure surplus fund is through investing in post-office deposits or bank. These instruments have a low rate of risk-return spectrum.

Nonfinancial instruments                         

There are options available to invest your funds other than the financial instruments.  Gold and real-estate is the popular non-financial instrument which many people opt for investing. Nowadays gold futures to have been gaining popularity in the field of investment. It is gone beyond holding the physical goods.


Basic Understanding About Financial Instruments