Document on Financial instrument and their types and a brief introduction to the equity instruments and their categories.

1. Gulshankumar S
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Finance
Financial Instruments
Financial instruments are assets that can be traded, or they can also be seen as packages of
capital that may be traded. Most types of financial instruments provide efficient flow and
transfer of capital all throughout the world's investors. These assets can be cash, a contractual
right to deliver or receive cash or another type of financial instrument, or evidence of one's
ownership of an entity.
Types of Financial Instruments
Financial instruments may be divided into two types: cash instruments and derivative
instruments.
Cash Instruments
 The values of cash instruments are directly influenced and determined by the markets.
These can be securities that are easily transferable.
 Cash instruments may also be deposits and loans agreed upon by borrowers and lenders.
Derivative Instruments
 The value and characteristics of derivative instruments are based on the vehicle’s
underlying components, such as assets, interest rates, or indices.
 An equity options contract, for example, is a derivative because it derives its value from
the underlying stock. The option gives the right, but not the obligation, to buy or sell
the stock at a specified price and by a certain date. As the price of the stock rises and
falls, so too does the value of the option although not necessarily by the same
percentage.
 There can be over-the-counter (OTC) derivatives or exchange-traded derivatives. OTC
is a market or process whereby securities–that are not listed on formal exchanges–are
priced and traded.
Asset classes
Financial instruments may also be divided according to an asset class, which depends
on whether they are debt-based or equity-based.

2. Debt-Based Financial Instruments
 Short-term debt-based financial instruments last for one year or less. Securities of this
kind come in the form of T-bills and commercial paper. Cash of this kind can be
deposits and certificates of deposit (CDs).
 Exchange-traded derivatives under short-term, debt-based financial instruments can be
short-term interest rate futures. OTC derivatives are forward rate agreements.
 Long-term debt-based financial instruments last for more than a year. Under securities,
these are bonds. Cash equivalents are loans. Exchange-traded derivativesare bond
futures and options on bond futures. OTC derivatives are interest rate swaps, interest
rate caps and floors, interest rate options, and exotic derivatives.
Equity-Based Financial Instruments
Equity Instrument
Defining equity instrument
An equity instrument refers to a document which serves as a legally applicable evidence of the
ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to
company shareholders and are used to fund the business. It is, however, not necessary that the
issued equity must return a dividend for it is based on profits and the terms of business.
Categories of equity instrument
The equity instruments can be divided into numerous categories, the most common ones being:
 Common stock is one of the equity instruments issued by a public company to raise funds
from the public. The shareholders have the privilege of being entitled to co-ownership of
the company in addition to having the right to vote at the shareholders meeting as per the
proportion of shares. Besides, they also have rights to take decision in important issues
like raising capital to pay dividends and merging business. Moreover, the shareholders can
also apply for new shares when the company has increased capital or issues a new
allocation to the shareholders.
 Convertible debenture is another type of equity instrument which is similar to common
bonds, the only difference being that a convertible debenture can be converted into
common stock during the particular rates and prices mentioned in the prospectus.
Convertible debentures are quite popular for profitable returns from converted stock are
higher than those form common bonds.

3.  Preferred stock, another equity instrument, involves shareholders’ participation as a
business owner as in common stock. The variation lies in that the preferred shareholders
are entitled to receive repayment of capital prior to the common shareholders.
 Depository receipt is an equity instrument which entitles the rights to reference common
bonds, ordinary debentures, and convertible debentures. Investors holding a depository
receipt get benefits as shareholders of listed companies in every respects, be it the voting
rights or financial rights in the listed companies.
 Transferable Subscription Rights (TSR) is an equity instrument issued by a company to
all shareholders in proporti8on numbers of shares already held by them. This instrument
is used as evidence in shares of the company. The existing shareholders can sell/transfer
their rights to others if they do not want to exercise their shares.
 Warrants offer the right to purchase common stock at a certain price. They are valid
only for a limited period of time. The warrant expires if you do not purchase the stock
within the specified time frame. Warrants may be offered to existing shareholders or
packaged with a new purchase of stock or bonds.
 Options are similar to warrants, but the option holder must pay for the right to purchase
or sell stock at the specified price. Brokers and private investors may sell their own
customized option packages. A call option grants the holder the right to purchase shares,
while put options offer the right to sell a certain number of shares. The party selling the
option is obligated to complete the transaction if the buyer chooses to exercise. If the
option expires without being exercised, the buyer loses the money he paid for the
option.
Reference
https://www.upcounsel.com/equity-instruments
https://www.investopedia.com/terms/f/financialinstrument.asp
https://www.readyratios.com/reference/accounting/equity_instrument.html