Financial Instrument

A financial instrument is an agreement that acts as an asset for one party and a liability for another. Used by investors to predict future value, it can be categorized into cash and derivative instruments, equity-based and debt-based instruments, or foreign exchange instruments. 

Functions  

• Used as a means of payment

• Transfers future purchasing power.

• Allows for risk transfer.

• Helps in managing expenses and maximizing revenue.

Types of Financial Instruments  

Cash Instruments 

Examples include shares, bonds, and cheques. 

Equity Instruments 

Includes dividends, preferred stock, and common stock. 

Debt Instruments 

Includes loans, bonds, credit cards, etc. 

Foreign Exchange 

Allows trading one currency for another. 

Benefits 

Distributes risk and provides a funding source for enterprises. 

Drawbacks 

Limited withdrawals from liquid assets and higher risk with swaps. 

Key Financial Instruments

Stocks 

Equity investment in a company with high risk and high potential returns. 

Bonds 

Safe investment with more earnings security. 

ETFs 

Collection of securities traded on an exchange. 

Mutual Funds 

A market investing strategy. 

CDs 

A federally insured account with a fixed interest rate for a specific time. 

REITs 

Allows indirect participation in real estate.