Financial instruments are assets that can be traded, or they can also be seen as packages of capital that may be traded.
Classification of financial market instruments
Participants for the purpose of conducting transactions in the financial market use appropriate financial instruments – financial documents circulating on the market with monetary value. Financial instruments circulating in certain segments of the financial market are quite diverse. Let’s consider the main ones.
Instruments by types of financial markets
Equity capital instruments: money and settlement documents circulating in the money market.
Instruments of the securities market: a variety of securities circulating on the stock market (the composition of securities by their types, characteristics of issue and circulation is approved by the relevant regulatory legal acts).
Foreign exchange market instruments: foreign currency, settlement currency documents, as well as certain types of securities serving the foreign exchange market.
Insurance market instruments: insurance services offered for sale (insurance products), as well as settlement documents and certain types of securities serving the insurance market.
The market for gold (silver, platinum) and precious stones: these precious metals and stones are bought in order to form financial reserves and bezavratsii; it is also settlement documents and securities serving the gold market.
Real estate market instruments: securities and documents certifying ownership of a particular type of real estate.
Instruments by maturity
following financial instruments are distinguished by maturity:
- short-term (with a circulation period of up to one year), they are the most numerous and are designed to service transactions in the money market;
- long-term (with a circulation period of more than a year) – the so-called perpetual financial instruments, the final maturity of which is not set (for example, shares); these financial instruments serve capital market operations.
Instruments depending on the nature of financial liabilities
By the nature of financial liabilities, financial instruments are divided into the following:
- without subsequent financial liabilities, that is, instruments for which no further financial liabilities arise; as a rule, they are the subject of a direct financial transaction and when they are transferred to the buyer, the seller does not bear additional with respect to them financial obligations (for example, currency values, gold);
- debt, characterizing the credit relationship between their buyer and seller and obliging the debtor to repay their within the stipulated time frame face value and pay additional interest in the form of interest (if this compensation is not included in the face value of the debt financial instrument being repaid).
Examples of debt financial instruments are bonds, bills of exchange, checks.
In addition to government bonds, corporate bonds can also be issued.
A bond is a security that certifies that its owner has deposited money, determines the relationship of the loan between the bondholder and the issuer, confirms the issuer’s obligation to return the bondholder its par value within the time period stipulated by the bond placement terms and pay the bond yield, unless otherwise provided by the placement conditions.
A bill of exchange is a promissory note that gives its owner the unconditional right to demand payment of a specified amount from the promissory note issuer and the bill acceptor upon maturity.
Share financial instruments are stocks. Such financial instruments confirm the right of their owner to a share (share) in the authorized capital of their issuer and to receive the corresponding income (in the form of dividends).
A share is a security without a fixed circulation period, which certifies the property participation of its owner in the capital of a joint stock company. Shareholders become shareholders of the joint-stock company, its co-owners, therefore they cannot demand the return of the invested funds from the company. However, they can sell shares, but in this case they lose the right to co-owner.
Instruments depending on priority
The following financial instruments are distinguished by priority:
- primary (first-order financial instruments). Such financial instruments (as a rule, securities) are characterized by their issuance into circulation by the primary issuer and confirm direct property rights or credit relations (stocks, bonds, checks, bills of exchange, etc.);
- secondary, or derivatives (second-order financial instruments, derivative securities), which characterize exclusively securities that confirm the right or obligation of their owner to buy or sell primary tradable securities, currency, goods or intangible assets under predetermined conditions in the future. Such financial instruments are used to carry out speculative financial transactions and to insure price risk (hedging). Depending on the composition of the primary financial instruments (or the assets to which they are put into circulation), derivatives are divided into stock, currency, insurance and commodity. The main types of derivatives are options, swaps, futures and forward contracts.
An option is a contract for the right to buy or sell a certain number of securities at any time during a certain period at a fixed price.
A warrant (a type of option) is a certificate that gives its owner the right to buy a certain security at a fixed price at a certain time. Warrants are not issued on their own, but with other securities (for example, together with preferred shares or corporate bonds) in order to make them more attractive.
A futures contract (financial futures) is a standard document to buy or sell a specified number of a specified security at a specified time at a specified price.
Financial futures, which are also a contract for a transaction with securities at a fixed time in the future, differ from options in that they provide an obligation, not a right, to carry out a particular transaction, which is assumed by the buyer of the futures. Future Carried out exclusively on the trading is organized financial market.
A forward contract is a specially concluded futures contract that meets the needs of a particular client, which is not a standard one, which is not concluded in an organized financial market.
Swap (exchange) – a bilateral agreement on the exchange in the future of a series of payments in different currencies.
Instruments depending on the guarantee of the level of profitability
According to the guarantee of the level of profitability, financial instruments are divided into the following:
- with a fixed income. They are characterized by a guaranteed level of profitability at maturity (or during the period of their circulation) regardless of market fluctuations in the borrowed interest rate (rate of return on capital) in the financial market;
- with uncertain income. They are characterized by a level of profitability that can vary depending on the financial condition of the issuer (ordinary shares, investment certificates) or in connection with changes in the financial market conditions (debt financial instruments with a floating interest rate, “tied” to the established discount rate, the rate of a
certain “fixed »Foreign currency, etc.).
Instruments depending on the level of risk
The following financial instruments are distinguished by the level of risk:
- risk-free. These include government short-term securities, short- term certificates of deposit of the most reliable banks, “hard” foreign currency, gold and other precious metals and stones purchased for a short period. The term “risk-free” is to a certain extent conditional, since the potential financial risk includes any of the listed types of financial instruments; they are intended only to form a reference point for determining the level of risk for other financial instruments;
- low risk. These include, as a rule, short-term debt financial instruments serving the money market, the fulfillment of obligations under which is guaranteed by a stable financial position and a reliable reputation of the borrower (characterized by the term “first-class borrower”);
- with a moderate level of risk. They characterize financial instruments, the level of risk for which is approximately equal to the average market;
- with a high level of risk. These are financial instruments, the level of risk for which significantly exceeds the market average;
- with a very high level of risk (speculative). Such financial instruments are characterized by the highest level of risk and are used to carry out the most risky speculative transactions in the financial market. Examples of high-risk financial instruments are stocks of venture (risky) companies, bonds with a high interest rate, issued by a company with an unstable financial position, options and futures contracts.
The above classification reflects the distribution of financial instruments only according to the most essential general characteristics. Each of the considered groups of financial instruments, in turn, is classified according to separate specific features that reflect the peculiarities of their issue, circulation and redemption.
