Financial instruments are contracts that represent an asset to one party and a liability to another. They play a crucial role in the financial markets by enabling investment, financing, and risk management.
Types of Financial Instruments:
- Equities: Stocks represent ownership in a company and are traded on stock exchanges.
- Debt Instruments: Bonds and loans represent borrowed funds that must be repaid with interest.
- Derivatives: Options and futures derive their value from underlying assets, allowing for speculation and hedging.
- Commodities: Physical goods like gold, oil, and agricultural products that can be traded.
- Currencies: Foreign exchange instruments used in international trade.