What is the difference between a financial product and a financial instrument?
It is a direct relationship between you and the bank, not an impersonal legal right that can be transferred. The instrument has a direct correlation with market information (Option, Future, CFD ...), whereas product is generally an account, Bonds, Shares and loan.
a product that is connected with the way in which you manage and use your money, such as a bank account, a credit card, insurance, etc.: We offer our customers a comprehensive range of financial products.
A financial instrument is defined as a contract between individuals/parties that holds a monetary value. They can either be created, traded, settled, or modified as per the involved parties' requirement.
Common examples of financial instruments include stocks, exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), bonds, derivatives contracts (such as options, futures, and swaps), checks, certificates of deposit (CDs), bank deposits, and loans.
There are typically three types of financial instruments: cash instruments, derivative instruments, and foreign exchange instruments.
The instrument has a direct correlation with market information (Option, Future, CFD ...), whereas product is generally an account, Bonds, Shares and loan.
The most commonly used forms of retail financial products are bank accounts, accident and life insurance, credit cards, and mortgages (Figure 12.1). Coming slightly behind are personal loans and investment products.
- Company shares.
- Government bonds.
- Corporate bonds.
- Mutual investment funds.
- Exchange traded funds (ETF)
The following are examples of items that are not financial instruments: intangible assets, inventories, right-of-use assets, prepaid expenses, deferred revenue, warranty obligations (IAS 32. AG10-AG11), and gold (IFRS 9.
The two most prominent financial instruments are equities and bonds. Equities (or shares) are the ownership of a portion of a company, which can then be traded. The value of this portion may fluctuate depending on the company's performance and market conditions, making equities a potentially risky investment.
Is a financial instrument a type of asset or liability?
A financial instrument will be a financial liability, as opposed to being an equity instrument, where it contains an obligation to repay. Financial liabilities are then classified and accounted for as either fair value through profit or loss (FVTPL) or at amortised cost.
- Financial instruments generate increases in wealth that are larger than from holding money.
- Financial instruments can be used to transfer purchasing power into the future.
Receivables and loans of all types are considered financial assets because they represent a contract that conveys to their holder a contractual right to receive cash or another financial instrument from another entity.
Financial Instruments – Drawbacks
Cash deposits and money market accounts, considered liquid assets, will not permit money withdrawals for the duration of the agreement. A corporation could receive lower returns if it wants to withdraw before maturity.
Financial Instruments Valuation includes determining the Fair Value of equity instruments, debt instruments, derivatives (option and future contracts) and embedded derivatives (convertible bonds / preference shares). Financial Instruments may require valuation for commercial, financial reporting or regulatory purposes.
A security, in a financial context, is a certificate or other financial instrument that has monetary value and can be traded. Securities are generally classified as either equity securities, such as stocks and debt securities, such as bonds and debentures.
A musical instrument is a device created or adapted to make musical sounds. In principle, any object that produces sound can be considered a musical instrument—it is through purpose that the object becomes a musical instrument.
There are four types of products and each is classified based on consumer habits, price, and product characteristics: convenience goods, shopping goods, specialty products, and unsought goods.
| Parameters | Product | Service |
|---|---|---|
| Tangibility | Tangible | Intangible |
| Purchase | One-time | Recurring |
| Return | Returned | Cancelled |
| Ownership | Transferable and storable | Non-transferable and non-storable |
The Corporations Regulations in particular sets out a number of specific things that are not financial products, including (amongst other things) credit facilities, superannuation interests, surety bonds and rental agreements.
What are the most common financial products?
"Checking accounts" and "Credit cards" are the top two answers among U.S. consumers in our survey on the subject of "Most used financial products".
We can divide financial products into three categories: Savings: checking and savings accounts, deposits, and other. Investment: pension plans, mutual funds, and stocks. Financing: credits and loans, mortgages, etc.
In other words, a financial instrument is any asset that can be traded by an investor: they can buy and sell it. Contracts that we give a value to and then trade, such as securities, are financial instruments. Options contracts, futures, and bills are all financial instruments.
The term “financial instruments” covers both financial assets and financial liabilities, from straightforward cash to embedded derivatives. For example, all trade receivables, payables, bank loans, inter-company balances and debts and shares in another entity fall within the scope of this standard.
Mutual Funds are financial instruments. These funds are collective investments which gather money from different investors to invest in stocks, short-term money market financial instruments, bonds and other securities and distribute the proceeds as dividends.
