Financial Instruments
Definition
These are contracts between parties that can be created, traded, modified, and settled. They can be cash (currency), evidence of ownership interest in an entity (share), or a contractual right to receive or deliver cash (bonds).
Analogy
Imagine financial instruments as tickets for different events. Some tickets might be for concerts (stocks) where there's potential for high reward but also risk if the band doesn't show up; others might be for movies (bonds) where you know exactly what you're getting; some might even be gift cards (cash) that you can use anywhere.
Related terms
Securities: Representations of financial value that are tradable.
Derivatives: Financial contracts whose value is linked to the price of an underlying asset.
Equity: Ownership interest held by shareholders within a company.
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