 Common stock is a type of security that represents ownership of equity in a 

company. 
 A convertible debenture is a type of long-term debt issued by a company that can
be converted into shares of equity stock after a specified period. 
 stock that entitles the holder to a fixed dividend, whose payment takes priority over that of
ordinary share dividends.


*INTRODUCTION:

Instruments are a means to an end. You want to create music, you need a
musical instrument. You want to see videos, you need an audio-visual
instrument/equipment. Similarly, you want to make some money, you need to
own a financial instrument. A financial instrument is defined as a contract
between individuals/parties that holds a monetary value. They can either be
created, traded, settled, or modified as per the involved parties' requirement. In
simple words, any asset which holds capital and can be traded in the market is
referred to as a financial instrument.

Some examples of financial instruments are cheques, shares, stocks, bonds,

futures, and options contracts
Types:

Financial instruments can be primarily classified into two types

- derivative instruments and cash instruments.

Cash instruments are defined as instruments which can be transferred and valued
readily in the market. Some of the most common examples of cash instruments
are deposits and loans where the lenders and borrowers are required to be agreed
upon.

Derivative instruments, on the other hand, can be defined as instruments whose

characteristics and value can be derived from its underlying entities such
as interest rates, indices or assets, among others. The value of such instruments
can be obtained from the performance of the underlying component. Also, they
can be linked to other securities such as bonds and shares/stocks.
Uses of Financial Instruments

Three functions:

* Financial instruments act as a means of payment (like money).

Employees take stock options as payment for working.

*_ Financial instruments act as stores of value (like money).

1. Bank loans

__ Borrower obtains resources from a lender to be repaid in the future.

1. Bonds

__A form of a loan issued by a corporation or government.

__Can be bought and sold in financial markets.

1.Home mortgages

__ Home buyers usually need to borrow using the home as collateral for the
loan.

__ A specific asset the borrower pledges to protect the lender’s interests.

4. Stocks

__ The holder owns a small piece of the firm and entitled to part of its profits.

__ Firms sell stocks to raise money.

__ Primarily used as a stores of wealth.

*_ Financial instruments allow for the transfer of risk (unlike money).

Futures and insurance contracts allows one person to transfer risk to

another.

Insurance contracts:
Primary purpose is to assure that payments will be made under particular, and
often rare, circumstances.

Futures contracts:

An agreement between two parties to exchange a fixed quantity of a commodity

or an asset at a fixed price on a set future date.

A price is always specified.

This’s a type of derivative instrument.

Options:

Derivative instruments whose prices are based on the value of an underlying

asset.

Give the holder the right, not obligation, to buy or sell a fixed quantity of the
asset at a predetermined price on either a specific date or at any time during a
specified period.

Swaps:

Agreements to exchange two specific cash flows at certain time in the future.
Characteristics:

These contracts are very complex.

• This complexity is costly, and people do not want to bear these costs.

•Standardization of financial instruments overcomes potential costs of

complexity.

• Most mortgages feature a standard application with standardized terms.

Standardization:

Overcome the costs of complexity

Makes them easier to understand

Communicate Information:

Summarize essential information about issuer

Eliminate expense of collecting information