Financial Instrument

A financial instrument is a tradable contract or product with monetary value, such as a share, a bond, a futures contract or an option.

A financial instrument is a contract or claim that can be traded and has money value, such as a share, bond, fund unit or derivative. Brokers and exchanges list instruments; traders buy and sell them. Legal definitions differ by country.

Category
Trading Basics
Reading time
3 min
Also called
Instrument, Tradable instrument, Security
Updated

Financial instrument in plain words

Securities regulators use a broad working definition: securities, derivatives based on them and traded commodity derivatives all count.1

Exchanges exist to bring many buyers and sellers of these instruments together.2

Accountants split them three ways under IAS 32: financial assets, financial liabilities and equity instruments.3 The exact rules differ by country.

How to check an instrument before trading

  1. Name the instrument

    Is it a share, bond, fund, future, option or CFD?

  2. Find the type

    Securities, derivatives and traded commodity derivatives are all instruments.1

  3. Find the venue

    Check whether it trades on an exchange or over the counter.

  4. Read the terms

    Look at size, expiry, fees and settlement.

  5. Check the rules

    Rules for each instrument differ by country and venue.

  6. Match your goal

    Pick the simplest instrument that does the job.

Worked examples

Example 1 — A share

Equity instrument

A hypothetical investor buys 5 shares on an exchange.

Example 1 — A share — calculation
InstrumentShare
VenueExchange

Shares are securities, which IOSCO counts as financial instruments.1

Example 2 — A convertible

Two parts

A hypothetical company issues a convertible bond.

Example 2 — A convertible — calculation
Debt partLiability
Option partEquity

A convertible bond mixes debt and equity, so accountants split it into a liability part and an equity part.3

Example 3 — A crypto token

Label risk

A hypothetical token behaves like a share but is sold as 'utility'.

Example 3 — A crypto token — calculation
LabelUtility
SubstanceShare-like

Regulators look at what a crypto-asset actually does and whether it works like a traditional instrument — the label alone doesn't decide.1

Cash instruments vs derivatives

AspectCash instrumentDerivative
ExampleShare, bondFuture, option
Value fromItselfAn underlying
LeverageUsually noneOften built in
ExpiryUsually noneOften fixed

Where the term appears

Advantages and disadvantages

Advantages

  • One word covers many tradable products.
  • Helps compare risk across products.
  • Used in regulation and accounting.

Disadvantages

  • Legal definitions differ by country.
  • The term hides very different risks.
  • Labels can be misleading for new products.
  • Complex instruments can be hard to value.

Going deeper

Read as far as you need. Each level builds on the one before it.

Broad term

Beginner

The category is broad: securities, derivatives on them and traded commodity derivatives.1

Accounting view

Intermediate

IAS 32 sorts instruments into assets, liabilities and equity, and splits hybrids such as convertible bonds into their debt and equity parts.3

Substance over form

Advanced

For new products, IOSCO focuses on economic substance and substitutability vis-à-vis traditional financial instruments.1 National regulators apply their own rules.

Common mistakes

  1. Treating all instruments alike

    Risks differ widely.

  2. Trusting the label

    Check the substance.

  3. Ignoring the venue

    Exchange and OTC differ.

  4. Skipping the terms

    Read expiry and fees.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1Which is a financial instrument?
Q2How is a convertible bond treated under IAS 32?

Key points to remember

  1. A financial instrument is a tradable financial contract.
  2. It includes securities and derivatives.
  3. Exchanges bring buyers and sellers together.
  4. Accounting splits them into assets, liabilities and equity.
  5. Definitions differ by country.

Frequently asked questions

Is cash a financial instrument?

In accounting, cash is a financial asset; legal lists vary.

Is crypto one?

It depends on its substance and the country.

Are all instruments regulated the same?

No, rules differ by instrument and country.

Further learning

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. IOSCO. Policy Recommendations for Crypto and Digital Asset Markets (FR11/2023) (opens in a new tab) Checked .
  2. IOSCO. Decentralized Finance Report (OR01/2022) (opens in a new tab) Checked .
  3. IFRS Foundation. IAS 32 Financial Instruments: Presentation (opens in a new tab) Checked .

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.