From a young age, we should all be familiar with financial instruments, especially with financial education.
We hear more and more about financial instruments and their importance, both on TV, in the media, and online. A pretty good thing, which helps us to familiarize ourselves with them and their importance as easily as possible.
In today’s article, we will talk about all financial instruments, what they are, and their importance.
What are financial instruments?
If you are not familiar with what financial instruments are, you will learn more about these markets in this article.
As everyone understands, financial instruments are those contracts between 2 parties, through which certain rights to financial flows are sold and bought.
A definition of financial instruments is provided by the Bucharest Stock Exchange: An anonymous transaction that offers the ability to buy or sell without the 2 parties meeting.
How do financial instruments work?
If we have clarified what financial instruments are, the next step is to understand how they work.
In the financial market, to the extent that financial instruments are tradable on the stock exchange, they are also called financial products. We often meet them under the name of financial securities and, because they bring future returns for the investor, they are also called financial assets.
Due to their ease of trading, financial instruments are also called securities or securities.
If we choose to refer to their complexity, financial instruments can be classified into:
- primary financial instruments,
- derivatives and
- other types of synthetic instruments;
Primary financial instruments are issued by capital applicants or investment funds (ex: shares, bonds, or other securities)
Classification of financial instruments
Depending on their nature, the method of exercise and the content of the rights involved, financial instruments are classified as simple or derivative and non-complex or complex.
From an accounting point of view, financial instruments are divided into:
- ActiveE
- financial debts.
Here are some examples of financial instruments:
- Bank deposit – this is the most common, best-known and simplest financial instrument, used for both savings and investments.
When you deposit a certain amount of money in a bank deposit, the bank will add interest for the time you keep the money in that deposit.
- Shares – another example of a very well-known financial instrument.
The social parts that the owners of a joint-stock company hold are the shares, and these are, of course, financial instruments.
- Bonds – They are another type of financial instrument used mainly by the state, state entities and private companies, which borrow in the market and offer a fixed interest rate for the money they use.
3.1. Financial derivatives with examples
What are financial derivatives?
They are based on the return offered by another financial instrument or commodity, called the underlying asset. In short, the yield of the financial instrument is derived from the evolution of the price of an instrument, commodity or other asset.
Here are some examples of financial derivatives:
· the gold;
· currencies;
· actions;
· stock market indices
3.2 Fixed income financial instruments
When we talk about fixed income financial instruments, the situation is a little different.
Depending on the nature of the income it provides, we can have the following financial instruments with fixed income:
· fixed interest bonds;
· state securities;
· land documents;
· preferential shares;
· or other derivative instruments.
In addition to financial instruments with fixed income, we also have those with variable income which can be: shares, bonds with variable interest, derivatives.
3.3. Primary financial instruments
Depending on how they are created, financial instruments can be primary, special, derivative or synthetic.
When it comes to primary financial instruments, they can be basic, issued by capital seekers and investment funds, ie: shares, bonds or securities of collective investment undertakings.
3.4. Synthetic financial instruments
In the case of synthetic financial instruments, they refer to stock index futures, options strategies, CFDs.
Types of financial instruments with examples
On the financial market, there are several types of financial instruments to meet all the needs of economic actors.
Here are other types of financial instruments that you should know and familiarize yourself with:
- Cash and cash equivalents.
- Bank deposits, mortgages, bank loans.
- Actions.
- Obligations (bonds),
- Forex Spot.
- Contracts for difference.
- Options.
- Futures.
- Mutual funds.
- ETFs – exchange traded funds.
Investment tips and strategies in financial instruments
The analysis of historical investment returns have been and are still the subject of numerous specialized studies that show us that in long-term investments, the main assets are the ones that gain.
One thing you need to know from the start is that there are 3 simple principles in investing:
- Long-term investments.
- Diversification.
- Consistency.
Diversification teaches you not to put all your eggs in one basket.
By this we don’t just mean investing in multiple companies, but also in multiple asset classes, regions or currencies. These will help you maintain constant diversification.
Investing in steps is a very effective strategy, through which you can reduce the risk of an investment, by staggering the total amount you want to invest, in smaller installments. In other words it is very important to invest the money step by step.
The least risky financial instruments
As an investor in the capital market you will inevitably encounter risks in your investments. The important thing is to be prepared for them, know how to overcome them and learn from them. Any investment in funds also entails risks.
These risks differ and can come from many causes. Either from the characteristics of the instruments you invest in, or from the organization and dynamics of the economic, geo-political, social system, within which the market you invested in operates.
An example of risk was the Covid-19 pandemic. This has attracted negative effects that have also affected investments.
Here are some of the less risky financial instruments:
Bank deposits, this being the least risky investment, but also the one with the lowest return.
Bonds – these are a financial instrument with a higher risk, but also a higher earning potential.
In bonds listed on the Stock Exchange – being much more advantageous than unlisted ones, because they can be bought after the issue date and capitalized before the maturity date.
Even if you are an expert or just starting out in the field of investing, you should know that the essence of being a smart investor is diversification. You need to know as many types of investments as possible, to be able to choose the most suitable solution for your profile.
The important thing is to increase your earnings constantly and through diversification.
