Stock market 101: An introduction to financial instruments

Julie Brownlee, Fsp Invest, 01 Oct. 2014

Tags: financial instrument, financial instruments, what are financial instruments, investing, derivatives,

If you’ve decided to invest, the first thing you’ll have to decide is which financial instruments you’re going to use.

There are a wide array available. And depending on your attitude to risk, there will be different ones better suited to you.

So what is a financial instrument? And what financial instruments are out there?

Let’s take a closer look…

What is a financial instrument?

To give a financial instrument its formal definition, it’s an easily tradable package of capital.

All financial instruments are slightly different. They can be equity based, debt based or foreign exchange based.

Let’s look at some equity based financial instruments…

The most common financial instrument – shares

When you think of investing, shares are probably the first thing that comes to mind.

When you invest in shares, you buy a ‘share’ in a company. You can benefit from a company’s success through its share price rising and any dividends the company may pay out.

A financial instrument growing in popularity – ETFs

Exchange traded funds (ETFs) are becoming more popular since their launch.

Instead of investing in a specific company, you invest in a basket of shares that replicates the performance of an index.

ETFs are a great way to gain exposure to an index on the stock market.

The riskier financial instruments out there – derivatives

Investing in shares and ETFs come with risks. But financial derivatives take that risk factor up a notch. With that risk comes the chance of higher rewards.

Derivatives include warrants and single stock futures. These financial instruments aren’t suitable if you’re risk averse.

If it’s something you’re interested in pursuing, you need to understand exactly what you’re doing before risking any of your money. You can lose more than you originally put in.

So there you have it, an introduction into financial instruments.

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