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The 2 types of financial instruments:

  • Cash instruments — Deposits and loans, commodities, foreign currencies, and securities, such as stocks and bonds.
  • Derivative instruments — Futures, options, swaps and forwards, and assets that get — or derive — their value from the underlying asset they represent. Those assets can include commodities and precious metals, including silver and gold, as well as cash instruments, such as currency, stocks and bonds.

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The 2 asset classes for financial instruments:

  • Equity-based financial instruments — Provide their owners a stake in an enterprise. Most common example: stocks, both common and preferred.
  • Debt-based instruments — Involve loans with interest. Examples: mortgages, bonds, leases and notes.

Most investors tend to get involved with financial instruments by buying the cash varieties, including bonds, stocks and guaranteed investment certificates, or shares in an exchange-traded fund or real estate investment trust.

Investing in derivatives, such as stock options and futures, is more complex because the contracts involved can require investors to buy or sell assets at predetermined times and prices, regardless of their actual market value when the contract comes due.

Some derivatives can be difficult for investors to access because they’re not sold on a centralized exchange, such as the Toronto Stock Exchange. For that reason, they’re called over-the-counter derivatives, and you would need to work with a broker who specializes in them.

Even if you didn’t know the definition of financial instruments until today, you’ve probably been playing them as long as you’ve been investing.

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About the Author

Clayton Jarvis

Clayton Jarvis

Reporter

Clayton Jarvis is a mortgage reporter at Money.ca. Prior to joining the Money.ca team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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The content provided on Money.ca is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.