Short definition: Financial instruments are tradable assets or contracts that represent a monetary value or a claim on future cash flows.
Explanation: They facilitate the transfer of capital between investors and entities that need funding. Financial instruments can be broadly classified into four categories: cash instruments (e.g., currency, bank deposits), debt instruments (e.g., bonds, loans), equity instruments (e.g., stocks), and derivatives (e.g., options, futures).
Example: A bond issued by a company is a financial instrument representing a debt obligation, while a share of stock represents ownership in the company.
Additional information (optional): Financial instruments are used for various purposes, including raising capital, managing risk, and generating returns. They are traded in different markets, such as stock exchanges, bond markets, and over-the-counter (OTC) markets.