An “Asset” is a financial instrument that represents the supply of investments in the form of liabilities and equity. A Financial Instrument is a contract that is issued between two parties with monetary value that can be printed or traded. 

There are a plethora of financial instruments and most asset classes have pre-determined characteristics such as:

Bonds

Issued by a corporation or the government that borrows money from investors. In exchange for the capital loaned, the company will pay regular payments of interest. Bonds are a relatively safe asset class to include in a trading portfolio. Although they still fluctuate due to the interest rates, the bond maturity, and the quality of the credit. Usually referred to as fixed income instruments. 

Equity

Equities represent a portion of ownership in a business in the form of shares issued by the company. Equities do not pay fixed interest rates due to the volatility of the stock market. They are therefore a riskier asset class to invest in. However, there is the potential for a higher yield on capital, which makes this asset class the main attractions to investors globally. Individual investors can purchase shares of a company on the stock market. However, as the stock market is a secondary market, the transaction is between another existing shareholder not from the company. Similarly, if you decide to sell the shares, another investor will purchase them and not the company.

Currency Market

The Forex market is the largest and most liquid asset class in the world and continues to grow daily with an average of over $5 trillion traded daily. Geopolitical risk, global trade, and supply/demand cause volatile fluctuations. This makes it one of the more difficult and riskier asset classes to invest in. Investors have access to the FX market 24 hours a day Monday – Friday making it popular to investors worldwide.

Key Takeaways

  • A financial instrument is a legal documentation representing a monetary value between the parties involved
  • Financial instruments are divided debt or equity-based asset classes
  • There are two types of financial assets cash and derivatives instruments