what is a financial instrument 
financial instruments are assets that can be traded or exchanged some examples of financial instruments include stock shares exchange traded funds etfs bonds certificates of deposit cds mutual funds loans and derivatives contracts financial instruments provide efficient flow and transfer of capital among the world s investors they are assets that may be in the form of cash a contractual right to deliver or receive cash or another type of financial instrument or evidence of ownership in some entity madelyn goodnight investopediaunderstanding financial instrumentsfinancial instruments can be real or virtual documents representing a legal agreement involving any kind of monetary value equity based financial instruments represent ownership of an asset debt based financial instruments represent a loan made by an investor to the owner of the asset foreign exchange instruments comprise a third unique type of financial instrument different subcategories of each instrument type exist such as preferred share equity and common share equity international accounting standards ias define financial instruments as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity 1types of financial instrumentsfinancial instruments may be divided into two types cash instruments and derivative instruments types of asset classes of financial instrumentsfinancial instruments may also be divided according to an asset class which depends on whether they are debt based or equity based debt based instruments are essentially loans made by an investor to the issuer in return for a payment of interest short term debt based financial instruments last for one year or less securities of this kind come in the form of treasury bills t bills and commercial paper bank deposits and certificates of deposit cds are technically debt based instruments because they earn depositors interest payments exchange traded derivatives are traded for short term debt based financial instruments such as short dated interest rate futures there also are otc derivatives such as forward rate agreements fras long term debt instrumentslong term debt based financial instruments last for more than a year long term debt securities are typically issued as bonds or mortgage backed securities mbs exchange traded derivatives on these instruments are traded in the form of fixed income futures and options otc derivatives on long term debts include interest rate swaps interest rate caps and floors and long dated interest rate options equity based instruments represent ownership of an asset stocks are equity based instruments as are etfs and mutual funds that are invested in stocks exchange traded derivatives in this category include stock options and equity futures foreign exchange forex or f x instruments include derivatives such as forwards futures and options on currency pairs as well as contracts for difference cfds currency swaps are another common form of forex instrument in addition forex traders may engage in spot transactions for the immediate conversion of one currency into another 