To understand financial instruments well, it is also important to know what a financial market is in itself , since both terms are closely related. The financial market is a mechanism through which an exchange or transaction of financial assets can be carried out in order to determine prices. The instruments financial meanwhile, are a kind of financial contract that exists between two parts in order to create an active and passive .
What are financial instruments?
Financial instruments are all the products and services offered in the financial market in order to create a link and thus establish a relationship of interdependence between all parties.
What are financial instruments for?
Financial instruments are an important part of finance and are closely related to money and the economy of a country, although they can also be applied to personal finance. They are a type of contract carried out by companies that serve to establish and allow the transfer of assets , liabilities and equity between companies.
Among the main characteristics of financial instruments we find the following:
- They have abundant liquidity and this can occur quickly without causing losses in value.
- They may have a certain level of risk depending on the guarantees that are provided by the seller.
- It has profitability that acts against the risk assumed with the purchase of a financial asset.
- They can be created , marketed and also modified .
Throughout history and over time, people have needed many financial instruments to be able to increase their income, monitor their economy and prosper. This concept, according to historians, dates back to 4000 BC, when they began to be used to better control finances.
They are classified into two important groups that are:
- Cash instruments : these are financial products that have a value that has been determined by the market. They can become securities and are very easy to transfer.
- Derivative instruments : their value comes from underlying assets and can be classified into two types: assets based on equity and those based on debt.
This classification makes it possible to find different sub-classifications of financial instruments and among them we can find:
- Debt-based instruments that are long-term.
- Interest rate swaps
- Instruments that are based on short-term debt
- Interest rate futures
- Forward rate agreements
Types of financial instruments
In financial instruments we can find two important groups, complex and non- complex . In the case of non-complex ones, we refer to instruments that have a variable or fixed income. Complex instruments refers to all financial derivatives and among them we can find the following:
- Financial options : this type of instrument is the one that has the ability to grant the right to the person who buys and implies the obligation on the part of the seller so that the transactions carried out are made at a fixed price on a certain date.
- Financial futures : in this case, they are a group of financial contracts in which the agreement is made to exchange a certain financial asset on a future date using a price that has already been established previously.
- CFDs : they are a type of contract that is made through a series of bilateral contracts in which an exchange is made between the difference that a certain asset has, which is measured by the opening contract and the ending contract.
What are the main
The main financial instruments are the following:
- Cash instruments : it is a classification made on a financial product whose value is determined by the market.
- Derivative instruments : are those that have a value derived from an underlying asset and can be based on equity or debt.
Financial instruments by country
In Mexico , various types of financial instruments are used, such as direct bonds , stocks , collective investment vehicles and investment funds , which are generally long-term. In the country, it is taken into account whether these instruments can meet the main objective, which is profitability and tolerance to risk .
It is determined by the General Accounting Plan and is defined as a contract that has the ability to form a financial asset within a company and at the same time a financial type of liability.
In the country, banking institutions and the government are in charge of applying financial instruments. People can have access through monetary entities or banks.
Financial instruments are of great importance for the economy in general and for companies since they can be used very easily to be able to obtain faster payments or to be able to face the different financial problems that may arise. It is a mechanism that provides greater security , mainly when capital uses liquid assets.
They give an important support to be able to finance the assets that are of a tangible nature through a transparent transfer of funds which are executed in surplus values. They also have the ability to establish and anticipate risks for counterparties when they have made an investment of intangible assets. When companies use this type of instrument, they also have the ability to be able to produce higher income and protect themselves against political uncertainties.
Finally, they have the ability to act as a type of permanent source of funds for a company or for a given organization allowing an organization to be established that generates more open opportunities to enjoy the profits that have been retained.
Some examples of financial instruments are the following:
- A bank account that creates a link between companies, people and institutions.
- Checks, contracts and bills of exchange.