Investing for beginners: The ins and outs of financial instruments

Julie Brownlee, Fsp Invest, 31 Mar. 2015

Tags: financial instrument, financial instruments, what are financial instruments, examples of financial instruments, investing,



If you want to invest, you can put your money to work in different financial instruments.

So what are financial instruments? And where can you find them?

Read on to find out more…



What is a financial instrument?


By definition, a financial instrument is an easily tradable package of capital. Different financial instruments have different characters and structures,

These financial instruments allow the efficient flow of capital amongst different investors.

Financial instruments involve a vast number of different investment products. When building your investment portfolio, over time you want to include a number of different financial instruments. This gives you diversification and reduces your overall investment risk

Let’s take a closer look at some different types of financial instruments…


The variety of financial instruments available


Shares
Shares are perhaps the most well-known and easiest to understand of all the different financial instruments. Through investing in shares you become a part owner in a business listed on the stock market. Shares are equity-based financial instruments.

Exchange traded funds (ETFs)
ETFs are also listed on the stock exchange. Through investing in one you gain exposure to a basket of shares depending on the mandate of the ETF. ETFs are also equity-based financial instruments.

Single stock futures
Single stock futures are a type of financial instrument called derivatives. This is because the value of single stock future is derived from an underlying share.

Bonds
Bonds are debt-based instruments. By buying bonds you’re lending the government or a corporation money. Retail government bonds also fall into this category.

Cash
Everyone is familiar with how cash works and have used this financial instrument. In terms of investments, you should hold some cash, but it’s not an investment.

So there you have it, the ins and outs of financial instruments.

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