Glossary - Financial Instrument
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. These instruments can be divided into equity-based, representing ownership of an asset, or debt-based, representing a loan made by an investor to the owner of the asset.
Also known as
- Securities
- Investment vehicles
Use cases examples
- Prospectus: The company's prospectus details its issuance of shares as a financial instrument to raise capital for expansion.
- Loan Agreement: In the loan agreement, the financial instrument is represented by the terms under which the lender provides a loan to the borrower, specifying repayment conditions and interest rates.
Considerations for investors
- The risk-return profile of different financial instruments and how they fit into the overall investment strategy.
- The rights and obligations associated with each financial instrument, including voting rights, dividend entitlements, and priority in case of liquidation.
Considerations for founders
- Understanding the implications of selecting different types of financial instruments for raising capital, including the dilution of ownership and the impact on the company's balance sheet.
- The legal and regulatory requirements associated with issuing financial instruments, which can vary significantly by geography and instrument type.
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