A 

financial instrument is a monetary contract between parties. We can create, trade,

or modify them. We can also settle them. A financial instrument may be evidence of
ownership of part of something, as in stocks and shares. Bonds, which are contractual
rights to receive cash, are financial instruments.

Checks (UK: cheques), futures, options contracts, and bills of exchange are also
financial instruments.

Securities, i.e., contracts that we give a value to and then trade, are financial
instruments.

Put simply; a financial instrument is an asset or package of capital that we can trade.

The Association of Chartered Certified Accountants (ACCA) has the following

definition or a financial instrument:

“A financial instrument is any contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.”

“The definition is wide and includes cash, deposits in other entities, trade receivables,
loans to other entities. investments in debt instruments, investments in shares and other
equity instruments.”
A financial instrument can represent ownership of something, a loan that an investor made to the
asset’s owner, or a foreign currency.

Financial instrument – cash or derivative

There are two main types of financial instruments, derivative or cash instruments.
Derivative instruments
Derivative instruments are instruments whose worth we derive from the value and
characteristics of at least one underlying entity. Assets, interest rates, or indexes, for
example, are underlying entities.

We also call them ‘derivatives.’ They are contracts whose values come from the
performance of an underlying entity.

Derivative instruments are securities that we link to other securities such as stocks or
bonds. ‘Stocks,’ in this context, means the same as ‘shares.’ Derivative instruments can
also be linked to Forex and Cryptocurrencies.

According to TradingOnlineGuide.com, the term FOREX stands for the Foreign

Exchange Market.

Cash instruments
Cash instruments are instruments that the markets value directly. Securities, which are
readily transferable, for example, are cash instruments. Deposits and loans, where both
lender and borrower must agree on a transfer, are also cash instruments.

Financial instrument by asset class

We can also categorize financial instruments by asset class, depending on whether they
are debt or equity based.

Debt-based financial instruments reflect a loan the investor made to the issuing

entity.

Equity-based financial instruments, on the other hand, reflect ownership of the

issuing entity.

Regarding these types of financial instruments, Wikipedia writes:

“If the instrument is debt, it can be further categorized into short-term (less than one
year) or long-term.”

“Foreign exchange instruments and transactions are neither debt- nor equity-based and
belong in their own category.”