What are Financial Instruments?

Financial Instruments are proof / acknowledgement provided by the government or organisation in return for the Capital provided by the investors.

When the Investors / Savers have excess funds, they invest that by buying shares (equity) in a company or by lending out money to the company / government. The documentation that is received by the investors acknowledging that an organisation / government has got money from them is know as Financial Instruments / Financial Securities / Financial Assets.

All Financial Assets / Instruments have the common goal of generating profits for the investor. Profits could be in the form of interest or in the form of Dividends and Capital Gains.

Assets generating Fixed Interests every month or quarter are called as Fixed Income Instruments. Fixed Income Instruments / Assets could be either from Private Corporations or from the Government. The Bonds / Fixed Income Financial Instruments from Corporations carry a higher risk factor when compared with the Government sector Bonds owing to the higher risk involved.

On the other hand, Financial Assets generating Dividends & Capital Appreciation are called as Equity Instruments. Shares / Stocks are considered as Equity Instruments. Dividends are declared by Companies when there is an operating profit. Also, the value of the share itself increases over a period of time and that results in increased gains.