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.

Let us start by looking at the definition of a financial instrument, which is that a financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of an other entity.

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.

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.

Basic examples of financial instruments are cheques, bonds, securities. There are typically three types of financial instruments: cash instruments, derivative instruments, and foreign exchange instruments.

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 most common basic financial instruments are cash, trade debtors, trade creditors and most bank loans. For a debt instrument (receivable or payable) to be basic, returns to the holder must be: •a fixed amount; •a positive fixed rate or a positive variable rate; or.

Financial instruments are classified as financial assets or as other financial instruments. Financial assets are financial claims (e.g., currency, deposits, and securities) that have demonstrable value.

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: equity, guarantees, and loans.

Who regulates financial instruments? ›

In total the PRA regulates approximately 1,500 financial institutions. The PRA has two statutory objectives: to promote the safety and soundness of these firms; and. to contribute to the securing of an appropriate degree of protection for policyholders (for insurers).

Some consider real estate a type of financial asset, but it's also considered a physical asset. Physical assets are tangible objects, such as property, art or valuable heirlooms, that require upkeep to maintain or increase in value.

Treasury Bills

It is considered an investment with the best returns. Since the government gives these, they are considered very safe. However, lower risks also translate into lower returns which is the case with treasury bills. As a result, the returns on Treasury Bills are lower than other money market instruments.

Cash instruments are financial assets that can be readily converted into cash. Examples include: Bank deposits like savings accounts, current accounts, and time deposits. Commercial paper issued by companies to meet short-term funding needs.

A financial instrument is simply a contract between entities that represents the exchange of money for a certain asset. Financial instruments include most types of investments: cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), certificates of deposit (CDs), loans, derivatives, and more.

There is a difference between a security and a financial instrument. Not all financial instruments are securities, but all securities are financial instruments. Primarily, the securities (instruments) are designed to be traded on the secondary markets (creation of exchange).