how many different methods is financial instrument classification
We can define in a general way, a financial instrument as any contract or agreement that simultaneously increases the financial assets of one entity and the financial liabilities of another. Next, in this post we share the classification that exists of financial instruments.
The whole variety of financial instruments can be classified depending on certain qualities. First of all, the market in which they operate or, as the financiers say, in which they circulate.
point one Classification of financial markets
The instruments of the credit market: they are monetary and settlement documents (they include bank cards).
Stock market instruments – a variety of securities.
The instruments of the foreign exchange market: foreign currency, foreign exchange settlement documents and certain types of securities.
The instruments of the insurance market: insurance services.
The precious metals markets: purchase of gold (silver, platinum) to form reserves.
Depending on the type of circulation, the following types of financial instruments are distinguished:
Short-term (circulation period up to one year). They are the most numerous, they serve for transactions on the money market.
Long-term (circulation period of more than one year). Among them are the “open” ones with indefinite expiration. They are used for capital market operations.
Financial instruments are classified according to the nature of the financial liability as follows:
Instruments for which subsequent financial liabilities do not arise (instruments without subsequent financial liabilities). As a rule, they are the subject of the financial transaction itself and, being transferred to the buyer, do not incur additional financial obligations on the part of the seller (for example, the sale of foreign exchange, the sale of gold bars, etc.).
Debt financial instruments. These instruments characterize credit economic relations between various legal entities and individuals, which are embodied in the transfer of value (money or things, defined by generic characteristics) on conditions of repayment or postponement of payment, as a rule, with the payment of interest. Depending on the object of credit – capital, commodity – money there are two basic forms of credit: commercial (sub-commercial) and banking. The relations between its buyer and its seller oblige the debtor to return within the stipulated term its nominal value and to pay additional compensation in the form of interest (if it is not included in the repayable nominal value of debt financial instruments).
Equity financial instruments. These financial instruments confirm the right of their holder to a share in the authorized fund of their issuer (a credit institution issuing bank cards, securities or other negotiable financial instruments) and to receive the respective income (in the form of dividends, interest, etc.). Equity financial instruments are, as a rule, securities of the respective types (shares, investment certificates, etc.).
The following types of financial instruments are distinguished by their priority importance:
Primary financial instruments (first-order instruments). These financial instruments (as a rule, securities) are characterized by their putting into circulation by the primary issuer and confirm the direct ownership rights or credit relations of shares, bonds, checks, bills of exchange, etc.).
Secondary (second-order) financial instruments are characterized exclusively as securities that confirm the right or obligation of their owner to buy or sell the primary securities in circulation, currency, goods or intangible assets under predetermined conditions in the future period. They are usually called derivatives or derivatives. These financial instruments are used for speculative financial operations and to insure price risk (hedging). Depending on the composition of the instruments or financial assets primary, in relation to which they are put into circulation, the derivatives are divided into instruments, securities, money, insurance, raw materials, etc, The main types of derivatives are options, swaps, futures and forward contracts (these instruments are solely intended for the operations of change and neither do we consider in our course).
Financial instruments are divided into the following types depending on the level of guaranteed yield:
Fixed income financial instruments. They have a guaranteed level of return at maturity (or during their period of circulation) regardless of financial market fluctuations. https://www.edulane.ng/
Financial instruments with uncertain performance. The level of performance of these instruments may vary depending on the financial situation of the issuer (ordinary shares, investment certificates) or due to the evolution of financial market conditions (debt financial instruments, with a variable interest rate, linked to a fixed discount rate, at the rate of a certain hard foreign currency, etc.)