What are financial instruments?
Financial instruments are assets or legal agreements that can be traded and can also be viewed as packages of capital that can be traded. Most of these provide transfer of capital throughout the world or provide efficient flow. These assets can be in the form of cash, a contractual right to deliver and receive cash, or evidence of a person’s ownership of an entity. Financial instruments are more like financial contracts between two or more parties and they can be created, traded, settled or modified. There are various financial instruments like shares, fixed deposits and currency.
Financial instruments can either be derivative or cash instruments.
- Cash instruments: These are mainly determined by the markets directly. They can be securities that are readily transferable and loans and deposits, where preferably both lender and borrower must agree on a particular transfer.
- Derivative instruments: These mostly derive their value from the characteristics of single or multiple entities, including an asset, interest rate or and index. They can either be exchange-traded derivatives or over-the-counter derivatives.
If you take into account what played a big role in the 1987 crash, one will recall the practice of using dynamic hedging to control losses and portfolio insurance was under the radar. Leveraged private equity transactions, hedge funds and emerging market debts, all had been responsible for upheavals, not to mention securitisation, which involves collateralised debt obligations (CDOs) and several other derivatives.
How to prepare for market risks?
- Maximize your liquid savings: At times of turmoil, cash accounts like certificates of deposit, savings, checking and money market accounts will get you through hard times. What most people try to do is turn these elements first as their value does not fluctuate with market conditions, which is the case with stocks, exchange-traded funds (ETFs), index funds and other financial instruments. This ensures that one can take his/her money out at any point of time without having to incur any sort of financial loss.
- Manage your Non-cash assets and maximize the value: This can better be explained in terms of a few examples. Take, for instance, keeping extra food in the house so that you can plan your meals in order to lower your grocery bills. Being prepared will have to start with identifying all of the options in hand. Another example, if you have rewards from your credit card, you might turn them into gift cards. All of these might help you lower the monthly expenses.
- Check the insurance coverage: Most experts recommend shopping around for lower insurance rates and if you are carrying a lot of insurance or could be getting the exact coverage from another provider costing the same, these are the few changes you can make to lower your bills. Having good insurance coverage will help you prevent as many crises as possible. Make sure you have the coverage that you actually need and not just something that supports the bare minimum. For example, disability insurance can help you sustain an injury or a significant illness whereas an umbrella policy can provide coverage where other policies fall short.
- Asset-backed security: These act as financial securities collateralised by a pool of assets such as royalties, loans and leases, credit card debt and others. Asset-backed securities are an alternative to investing in corporate debt. Asset-backed securities are more or less similar to mortgage-backed securities. Asset-backed securities allow the issuer to generate ample cash which is used up for more lending while giving potential investors the chance to invest in a wide range of income-generating assets.
- Equities: Apart from stock indices, individual indices are great financial instruments. Instead of gaining exposure through stock indices, you can simply trade individual stocks of firms. This allows you to enjoy company ownership depending on the number of shares you end up buying. Stocks come with high liquidity and hence trading volumes and as volatility tend to differ on a daily basis which allows traders to take advantage of the minute price movements.
- Fixed deposits: Fixed deposits have emerged as a powerful weapon and the most preferred option for saving surplus funds. According to a 2017 SEBI report, more than 95% households across urban and rural India believe in parking their surplus in fixed deposits. Now you can have investments with high returns coupled with stability and safety. It gives you the flexibility to choose from a range of tenures according to your preferences. Fixed deposits via Finserv MARKETS have a wide range of benefits like minimum documentation, the option of online investment and comes with the guarantee of investment with high returns of interest rates up to 8.95%.
The financial market binds millions of people together worldwide to trade a varied range of financial instruments. There are investment products available on Finserv MARKETS that can allow you to expand your wealth. Fixed Deposit interest rates on Finserv MARKETS range between 8% and 8.95%. Buying FDs online via Finserv MARKETS is fast and efficient process with high transparency and minimum documentation.
Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!