FINANCIAL INSTRUMENTS Meaning and
Definition
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Financial instruments refer to any tradable assets or contracts that represent a legally enforceable claim to some form of financial value. These instruments are utilized by individuals and entities alike to meet their financing and investment needs. They can be broadly categorized into three main types: cash instruments, derivative instruments, and hybrid instruments.
Cash instruments include securities such as stocks, bonds, and cash equivalents like certificates of deposit and money market accounts. These instruments are typically transacted in the financial markets and are characterized by their fixed or determinable monetary value.
Derivative instruments derive their value from an underlying asset or benchmark, such as commodities, stocks, bonds, or interest rates. They are contracts that derive value from changes in prices, rates, or indices and allow market participants to speculate or hedge against risks. Examples of derivative instruments include futures contracts, options, swaps, and forward contracts.
Hybrid instruments combine elements of both cash and derivative instruments. They can have a mix of characteristics, such as convertible bonds, which combine the features of a bond and an option to convert the bond into equity shares.
Financial instruments play a crucial role in facilitating transactions, allocating risks, and providing opportunities for investment and speculation. They enable individuals, companies, and governments to raise capital, invest surplus funds, diversify portfolios, and manage financial risks. Financial markets serve as platforms where these instruments are traded, allowing buyers and sellers to interact and determine their values through supply and demand dynamics. Hence, understanding financial instruments is essential for individuals and entities seeking to make informed financial decisions and navigate the complex world of finance.
Etymology of FINANCIAL INSTRUMENTS
The word "financial" comes from the Late Latin word "financialis", which pertains to money or finances. It is derived from the Latin word "finis", meaning "end" or "boundary", and originally referred to paying off debts or settling accounts.
The word "instrument" comes from the Latin word "instrumentum", which means a tool or implement. It comes from the verb "instruere", which means "to equip" or "to prepare".
Therefore, the term "financial instruments" refers to tools or implements used in the context of finance or money matters. It generally encompasses various forms of tradable assets, securities, and contracts that have a monetary value and can be utilized for investment, hedging, and other financial purposes.
