Introduction to Financial Instruments
What Are Financial Instruments?
A financial instrument is a contract that creates a financial asset for one entity and a financial liability or equity instrument for another entity. Financial instruments include cash, investments, receivables, payables, debt securities, equity securities, derivatives, and many other financial contracts.
Financial instruments play a central role in modern business because they help companies invest excess cash, raise capital, manage risk, and finance operations.
Note
Every financial instrument involves at least two parties—one holding a financial asset and the other assuming a financial liability or issuing equity.
- Cash and cash equivalents.
- Accounts receivable and payable.
- Debt securities.
- Equity securities.
- Derivative instruments.
Summary
Financial instruments are contractual rights and obligations that form the foundation of many business financing and investment activities.