Financial instrument - Definition and Overview

Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. Their diversity of forms mirrors the diversity of risk that they manage.

Financial Instruments can be categorised according to whether they are securities, derivatives of other instruments (see derivative securities), or so called cash securities. If they are a derivative, they can be further categorised depending on whether they are traded as standard derivatives or traded over the counter (OTC).

Alternatively they can be categorised by 'asset class' depending on whether they are equity based (reflecting ownership of an asset) or debt based (reflecting a loan the investor has made to the owner of an asset). If it is a debt security, it can be further categorised 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.

Combining the above methods for categorisation, the main instruments can be organised into a matrix as follows: