What are Financial Instruments, Assets and Securities?

A financial instrument is any asset that holds capital and may be traded on the market. Cheques, stocks, shares, bonds, futures, and options contracts are all types of financial instruments. Money Market Funds (also known as liquid funds), Bank Fixed Deposit (Bank FDs), Post Office Savings Schemes, Public Provident Funds (PPF), Company Fixed Deposits (FDs), Bonds and Debentures, Mutual Funds are other types of financial instruments.

 Financial assets are financial claims (e.g., currency, deposits, and securities) that have Demonstrable value. Other financial instruments (e.g., financial guarantees and commitments such as lines of credit, loan commitments, and letters of occurrence of uncertain future events are outside the financial assets boundary and are classified as other financial instruments.

Most financial assets are financial claims arising from contractual relationships entered into when one institutional unit provides funds to another. These contracts are the basis of creditor/debtor relationships through which asset owners acquire unconditional claims on the economic resources of other institutional units. Financial instruments comprise the full range of financial contracts made between institutional units. Financial instruments are classified as financial assets or as other financial instruments.

Cash instruments:

Cash instruments include things like deposits and loans, as well as easily transferable securities. A security is a financial instrument that has monetary value and is traded on the stock market. This type of instrument is directly influenced by the market, so any market fluctuations will be directly reflected in the cash asset’s value.

Instruments that are derivatives:

Derivative instruments are assets, indexes, and interest rates that derive their worth from the value and attributes of one or more underlying entities. Exchange-traded derivatives (ETDs) and over-the-counter (OTC) derivatives are two types of derivatives.

Financial Securities:

Financial securities are contracts that represent a tradeable financial asset in the financial markets. Some of the common securities are debt (bonds) securities, equity (stocks) securities, derivative securities, hybrid securities, which are a combination of debt and equity, mutual funds, exchange-traded funds, and foreign exchange (Forex).

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