Financial instruments are contracts between parties for the exchange of monetary value. These instruments are created, traded, and modified, and can be in the form of cash, evidence of ownership interest in an entity, or a contractual right to receive or deliver a specific amount of currency or other form of value. They include debt, equity, and derivatives.
Another type of financial instrument is insurance. An insurance contract promises to pay for a loss event in exchange for a premium. For example, a car owner buys car insurance to cover the financial loss if they are involved in a car accident. Insurance contracts are usually custom-made, which means they are tailored to the needs of the parties involved. The drawback to custom-made agreements is their illiquidity, and they require time to understand all the details. Standardized contracts, however, help reduce their illiquidity.
Other types of financial instruments are more complex and complicated. While stocks and bonds are standardized, derivatives involve more complex, customized transactions. The risk of investing in these instruments is higher than in most other forms of investment. It is therefore essential to understand the terms of your investment before entering into any transaction. The Securities and Exchange Commission regulates publicly traded securities, while the Commodity Futures Trading Commission regulates derivatives.
As mentioned earlier, financial instruments play a critical role in business transactions, trading markets, and day-to-day financial management. By writing checks to your landlord and trading stocks, you are actively contributing to the capital movement. SoFi Invest is a great tool to invest in these financial instruments, and you can even try out cryptocurrency and invest in IPOs with your account.
The Financial Instruments Reference Database is an online reference guide that describes financial instruments. It provides definitions and terms for five major asset classes. It represents these financial instruments according to their contractual cash flow obligations, and it makes it easier to understand and access financial instrument data. Its data dictionary is searchable, making the information more accessible and useful.
One type of financial instrument is a convertible bond. This type of financial instrument has a derivative embedded in it that can be converted into shares. The accounting for this type of financial instrument is similar to that of a single-asset. The convertible bond is an example of a compound financial instrument. While it has a complex structure, its accounting is the same as for any other type of equity instrument.
Another type of financial instrument is the exchange-traded derivative. This type of instrument is traded on an over-the-counter exchange and is different from stocks.