Financial Instruments

The article contains some basic information over Financial Instruments┬áthat You’ll surely find useful. The dictionary meaning of financial instruments states that, they are tradeable packages of capital, with each having their own unique characteristic and structure. The wide ranges of financial instruments that are available in the marketplace allow free flow of capital among the investors. In simple terms a financial instrument is noting but a real document which represents some monetary value.

Financial Instruments

In today’s market place the financial instruments can be classified as equity based, which represent the ownership of the asset or debt based, which represent a loan made by an investor to the owner of the asset.

Funds are raised in the equity market by the issue of shares which further create ownership in the company. That is, equities can be purchased through Initial Public Offerings (IPO) which is made directly by the company. The returns on equities are generally higher over a long period of time as compaired to other investment options. Though investing in equities is a good option however the possibility of greater risks is also attached with such higher returns.

Brokerage houses on the other hand act as intermediaries and underwrite the securities by guaranteeing the price offered by the company. The equity market also provides for reselling securities which have already been issued in the main market however they are sold in the open market without a price guarantee by stockbrokers or dealers.

Another important financial instrument which is traded in the stock market is the mutual fund. The mutual fund allows for professional management of funds which are pooled in by a group of people who have a predetermined investment objective.

The mutual fund investors are provided with benefits like cost-efficiency, risk-diversification, professional management and sound regulation of their money. The risk attached to mutual funds varies according to the choice.

Debt instruments like bonds, debentures or mortgages are legal financial documents which require the borrower to pay certain amount of interest at stipulated intervals to the lender until the maturity date. After which the borrower repays the principal amount. The maturity date refers to the date on which the bond expires.

A debt instrument can be short-term (which requires one or less year for repayment), medium term (which can be repaid within one to ten years), or long term (which has a long duration of more than ten years for repayment).

Bonds can be defined as fixed income instruments which are issued with the aim of raising capital. Companies, financial institutions as well as governments and other government institutions use bonds for acquiring funds.

Deposits in the form of investments in banks or post office deposits are a common way of securing additional funds. Such instruments are placed at the lowest end of the risk-return scale.

The market structure in which securities with short maturity dates, usually one year or less are traded is known as money market. The instruments traded in this market structure are regarded as cash equivalents therefore are relatively safe and liquid investment options. Investments in the form of treasury bills, short term government bonds, banker’s acceptances are treated as cash equivalents.

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