Financial instruments facilitate the occurrence of financial trade. They are mainly traded on the financial securities market. Financial instruments are numerous and include bonds, stocks, futures, options, and asset backed securities, commodities such as gold, silver and other precious metals.
To trade financial instruments, you must have access to the securities market where most, if not all the trades take place. You must first get a broker who will open an account for you, where you get to deposit money that you use to perform the trades you consider lucrative to indulge in. Get to compare and analyze the account that you think is best for you to trade in here https://www.equiti.com/accounts/compare-our-accounts/.
The market is filled with investors with various motives. There are investors hoping to get finances to facilitate their investments or the investors with excessive cash that they want to invest so that it multiplies and is able to fetch huge returns from the market. The financial securities investors hope to benefit largely from the securities market.
The financial markets through the use of the financial instruments are able to accomplish several roles. The financial instruments are able to function efficiently to accomplish the needs desired by the investor. Below are two main uses of financial instruments.
1. Used to transfer risk
Risk in the financial markets mainly implies the uncertainty of the future prices of commodities. Therefore, in the event that you are not confident about the pricing of your commodities in the future, and want to avoid the risks of incurring losses, then you can choose to transfer the risk to a more risk-tolerant individual.
The main financial instruments that facilitate the transfer of risk are futures contracts, options, plus insurance contracts. With futures contracts, two investors agree to tradeoff a fixed amount of products or properties at set price and future date. The options work the same way as the futures, since the price and date or exchange are pre-determined, and that the purchasing or buying of the agreed assets take place.
Insurance contracts are pretty much self-explanatory. Because of the uncertainty of what the future holds, you are forced to take up insurance covers so as to guarantee a comfortable future. Therefore, from all these, you can see that financial instruments provide the chance to store wealth and transfer risk.
2. Used to Store Value
Storing value is one very vital role of financial instruments. For instance, there are bank loans which involve the borrower getting resources that he or she has to repay at a future date. The other financial instruments that can be used to store value are the bonds. A bond is majorly a loan provided by the large corporations or by the governments too. Bonds can be transacted in the financial markets too.
There are also mortgages which are utilized by market players as security when seeking for loan money. The borrower presents the mortgage security to the lender who then releases the loan to the borrower. Hence, mortgage security which is a store for value cushions the lender in the event of default.
The other financial instruments that store value and are traded in the financial markets are the stocks plus asset-supported securities. With stocks, the possessor has ownership of a tiny piece of the company, and has rights to receive a bit of the company earnings. These stocks or shares are transacted by the company owner with the aim of collecting money. Therefore, you can see that the stocks have been utilized as a store for wealth.
Financial instruments’ use cannot just be classified as transacting. The financial instruments are far much beneficial than just being labeled as a transacting resource. The financial instruments accomplish several uses, which are classified into the store of wealth, and transfer of risk. Therefore, you choose the financial instrument to use depending on the benefits you intend to derive from it.