Financial Instrument

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Definition of 'Financial Instrument'

A financial instrument is a contract that gives the buyer or seller of the contract the right to either receive or deliver cash or another financial asset at a future date. Financial instruments can be classified into two main categories: debt instruments and equity instruments.

Debt instruments are financial assets that represent a loan from one party to another. The borrower agrees to repay the principal amount of the loan plus interest at a specified future date. Examples of debt instruments include bonds, notes, and loans.

Equity instruments are financial assets that represent ownership in a company. The holder of an equity instrument has a claim on the company's assets and profits. Examples of equity instruments include stocks, mutual funds, and ETFs.

Financial instruments are used by businesses, governments, and individuals to raise capital, manage risk, and speculate on the future value of assets. They are an important part of the financial system and play a vital role in the global economy.

Here are some additional details about financial instruments:

* Financial instruments can be traded on financial markets. The price of a financial instrument is determined by supply and demand.
* Financial instruments can be used to hedge against risk. For example, a company can use a futures contract to lock in the price of a commodity that it uses in its production process.
* Financial instruments can be used to speculate on the future value of assets. For example, an investor can buy a stock in the hope that the price will increase in the future.

Financial instruments are a complex topic and there are many different types of financial instruments. It is important to understand the risks and rewards associated with financial instruments before investing in them.

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