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
Name the instrument
Is it a share, bond, fund, future, option or CFD?
Find the type
Securities, derivatives and traded commodity derivatives are all instruments.1
Find the venue
Check whether it trades on an exchange or over the counter.
Read the terms
Look at size, expiry, fees and settlement.
Check the rules
Rules for each instrument differ by country and venue.
Match your goal
Pick the simplest instrument that does the job.
Worked examples
Example 1 — A share
Equity instrumentA hypothetical investor buys 5 shares on an exchange.
| Instrument | Share |
| Venue | Exchange |
Shares are securities, which IOSCO counts as financial instruments.1
Example 2 — A convertible
Two partsA hypothetical company issues a convertible bond.
| Debt part | Liability |
| Option part | Equity |
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 riskA hypothetical token behaves like a share but is sold as 'utility'.
| Label | Utility |
| Substance | Share-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
| Aspect | Cash instrument | Derivative |
|---|---|---|
| Example | Share, bond | Future, option |
| Value from | Itself | An underlying |
| Leverage | Usually none | Often built in |
| Expiry | Usually none | Often fixed |
Where the term appears
Exchanges
Listing on an Exchange.
Derivatives
Trading Futures Contract and Options.
Funds
Buying an Exchange-Traded Fund.
CFDs
Using a Contract for Difference.
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
Treating all instruments alike
Risks differ widely.
Trusting the label
Check the substance.
Ignoring the venue
Exchange and OTC differ.
Skipping the terms
Read expiry and fees.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A financial instrument is a tradable financial contract.
- It includes securities and derivatives.
- Exchanges bring buyers and sellers together.
- Accounting splits them into assets, liabilities and equity.
- Definitions differ by country.
Frequently asked questions
Is cash a financial instrument?
Is crypto one?
Are all instruments regulated the same?
Further learning
- Futures Contract
Futures.
- Options
Options.
- Exchange-Traded Fund
ETFs.
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.
- IOSCO. Policy Recommendations for Crypto and Digital Asset Markets (FR11/2023) (opens in a new tab) Checked .
- IOSCO. Decentralized Finance Report (OR01/2022) (opens in a new tab) Checked .
- 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.