Financial Instruments are any assets that hold monetary claims against income and asset of an entity.
Thank you for reading this post, don't forget to subscribe!- It can be categorized as primary and secondary financial securities.
- It can be also classified as cash instruments and derivative instruments.
- It can also be equity-based or debt-based.
Functions of Financial Instruments:
- Means of payment
- Means of raising captial
- Store of value
- Means for transferring risk
- Means of speculation
Means of Payment
Financial instruments such as cheques, debit cards, credit cards, electronic transfers, and digital wallets facilitate the settlement of transactions. They act as substitutes for cash, enabling individuals and businesses to make payments efficiently, securely, and conveniently.
Means of Raising Capital
Instruments like shares, bonds, debentures, and commercial papers allow firms, governments, and other entities to mobilize funds. Investors provide capital by purchasing these instruments, and issuers use the funds for expansion, operations, or new projects.
Store of Value
Many financial instruments, including fixed deposits, bonds, mutual funds, and savings accounts, allow investors to preserve their wealth over time. They provide a safe place to hold money with the expectation of earning returns while protecting against inflation or uncertainty.
Means for Transferring Risk
Derivatives such as futures, options, swaps, and insurance contracts help shift financial risks from one party to another. Businesses and investors use these instruments to hedge against price fluctuations, interest rate changes, currency movements, or unexpected losses.
Means of Speculation
Financial instruments enable investors to take calculated positions to profit from anticipated changes in market prices. Speculators use stocks, derivatives, commodities, and forex instruments to exploit short-term market movements with the aim of earning higher returns.
Types of Financial Instruments:
On the basis of maturity:
- Money Market Instruments
- Capital Market Instruments
On the basis of issuer:
- Primary Instruments
- Secondary Instruments
On the basis of creation of value:
- Cash Instruments
- Derivative Instruments