Financial instruments are legal documents that embody monetary value. There are several types of documents that are properly identified as a financial instrument, including cash instruments and derivatives.
A personal check can be a financial instrument as it has monetary value once it is issued.
When most people think in terms of financial instruments, they tend to identify what is commonly known as a cash instrument. They are simply documents recognized as money that can be used for various transactions. Currency is the most easily identified of all instruments of money, although documents such as checks or transfers of funds from bank accounts are also seen as instruments of money.
Another example of a financial instrument is a stock certificate that grants a holder a certain number of shares in a company.
Derivative instruments are another example of a financial instrument. This classification would include instruments such as futures, options and swaps. Some analysts also prefer to include stocks, bonds, and currency futures in this category, while others tend to consider them cash equivalents, as it is possible to settle debts by transferring ownership of stocks and bonds. Broadly speaking, a derivative instrument is some type of contract whose value is based on the current situation of the underlying assets.
In the real estate financing world, a mortgage is considered a financial instrument.
Other types of documents are often understood as a financial instrument. In global or real estate financing, the mortgage qualifies as a financial instrument. A commercial paper or stock index also meets the basic definition, as do bills of exchange.
A financial instrument can be a paper document or exist as a virtual document. Currency and checks would represent physical documents that represent specific monetary values and are used freely for transactions. Transfers of funds between bank accounts would be an example of a virtual financial instrument. Likewise, stocks and bonds can exist as hard copies or as virtual records that assign rights and privileges to a specific investor.