Types of Investment Instruments
A financial investment instrument is defined as a document which is used to acquire capital. It may exist as paper or as an electronic record. It has monetary value and is usually easily transferable. One example is a share certificate. The three basic types are:
- Equity-based instruments which are ownership in a company. There are two basic types; common and preferred stock/shares. Common stock has no maturity and no obligation for the company to repay the owner. Owners have the right to vote, among others. Owners of preferred stock are guaranteed dividend payments and have access to the company’s assets before common stock holders do in the event of liquidation. However, preferred stock holders they do not generally have the rights of the common stock holder.
- Debt-based instruments. Examples of these are bonds and government treasuries. A bond holder has lent money to the company or government and is entitled to interest payments as well as the repayment of the amount lent.
- Foreign exchange. This represents currency pairs that trade on foreign exchange marketswhere one country’s currency is exchanged for another.This instrument is not currently defined as a security for the purpose of the Eastern Caribbean Currency Union’s securities legislation.