Types of Financial Instruments

Contents

Financial Instruments

• Credits and Loans
• Bank Deposits
• Leasing
• Stocks and Bonds
• Futures

Conclusion

In financial markets, investors will surely face such things as financial instruments, no matter when. What are they? We’ll paint it in detail.

Financial Instruments

Financial Instruments imply a wide range of terms and definitions. It’s effortless to see how numerous they are: they include a category of banking tools, a group of market assets, and many other financial operations that many people have heard of.

All financial instruments can be roughly divided into two main groups: the first group is available to everyone without any exceptions, while the second one requires particular knowledge and skills. As a result, the first group will contain credits, loans, bank deposits, and leasing.

• Credits and Loans
  Credits and Loans are the most widespread financial instruments for citizens. A credit is an operation when a lender grants money to a borrower at a certain interest. The money, of course, is subject to return according to the agreement. As the years go by, global lending terms are getting “milder”, because banks are competing to retain customers, thus offering them better conditions. However, in developing economies it doesn’t work this way: in most cases, the rate on credit is a primary source of banks’ revenue.

• Bank Deposits
  Bank Deposits are another widespread financial instrument that doesn’t imply in-depth knowledge. In this case, a bank acts as a borrower and pays interest to a lender (an individual) for using their money after a specified period is over. The deposit rate is calculated based on the value of the country’s key interest rate, but sometimes there are other possible options.

• Leasing
  Leasing is a more complicated financial instrument but is quite available for citizens. Leasing agreements have 3 parties: after agreeing, a lessor gets a long-term asset, a lessee undertakes an obligation to pay money on account of debt repayment, and a distributor of a property or equipment sells their products.

Now let’s talk about the second group of financial instruments related to trading on financial markets and speculations of different types. In this case, speculations mean investment in high-risk assets with a possibility of a large income.

• Stocks and Bonds
  So, what are stocks and bonds? A stock is an ownership share. After buying stocks on financial stock exchanges, an owner is guaranteed the right to receive dividends. A bond is a financial instrument where the holder (investor) assumes the role of a creditor and the issuer assumes the role of a debtor. The creditor receives returns in the form of regular “interest” over a specified period and will receive the “principal” back when the instrument matures. Regarding risk, stocks are considered a more risky financial instrument, while bonds are more secure.

• Futures
  Futures are derivative financial instruments based on the SPA of an asset (stocks, goods, etc.), and when entering into the agreement parties agree only on the price and the delivery date. Other parameters are usually quite standard and defined by specifications. Futures are trade offers, which are traded on the market regularly.

Conclusion

Additionally, there are many other financial instruments available in this trading market, including options, foreign currency exchanges, contracts for difference, and others. Every investor can surely find a variety of financial instruments that match their objectives, knowledge, and financial possibilities.