Financial instruments are anything that can be used for trading, mainly for speculation or hedging purposes. These include, but are far from limited to Stocks, Forex, Commodities, Indices, ETFs.
The reason for the existence of such a vast range of financial instruments is that traders and brokers wish to have a variety of trading options at their disposal, with each one serving a unique purpose that can be utilized to render different outcomes.
Types of instruments
Financial instruments are largely categorized under one of two types: cash instruments and derivative instruments.
Cash instruments
Cash instruments refer to securities that are easily transferable and where the holder will often take possession of the underlying asset. For example, bonds, stocks, and shares are cash instruments.
Cash instruments can also be subcategorized into equity-based and debt-based instruments. They can also be divided into either long-term or short-term.
Derivative instruments
Derivative instruments are linked to a variety of products but what is truly traded is their underlying value and the holder will not take physical possession of the asset.
Forex
As financial instruments, Forex cannot easily be classified under the above categories. This is because depending on how you trade forex, it could fit into either.
Spot forex trading does involve an actual transfer of the asset and would therefore make it a cash instrument. However, it is most commonly traded through CFDs, Options, and Futures which only trade on the value of the asset derived from the spot market. Subsequently, trading Forex through any of these instruments would be classified as derivatives.
Key takeaways:
- There are a wide range of instruments available to be traded, each with their specific utilities and considerations
- Most instruments fit into two main categories: cash instruments and derivative instruments
- Forex could be either a cash or derivative instrument, depending on how it is traded