Financial instruments

From ArticleWorld

Financial instruments are tools for raising funds from outside. There are various Instruments through which funds can be raised. Each one has its merits and demerits.

The Financial Instruments include loans, bonds, bills of exchange, deposits, shares, securities etc.

The loans include secured and unsecured loans also short term and long term loans. Further instrument interest bearing and non interest bearing loans are also there. The bonds are instruments by which funds are collected from outside public or Financial Institutes. The bills of exchange are short term finance and received through banks. The banks are giving term loans for long term finance and working capital loans for standing facilities in form of cash credit, overdrafts etc. The rate of interest varies as per facilities and period of finance. The deposits are received from public through direct subscription or as business deposit.

The shares and stock are received from general public or private placement. There are various kinds of shares such as equity shares, preference shares etc. Equity shares are not burdensome when the company makes good profit and vice versa.

The financial instruments can also be traded in stock exchange with cash and forward trading modes. The financial instrument is also supported by foreign exchange transactions. Thus total money market is based on financial instruments. The financial instruments are the blood in an economy without which the economy cannot run at all.

While selecting the financial instruments, cost is always considered first, because for any business cost is main factor to survive in the market. Equity capital is somewhat costly at the time of public issue but later it becomes cheaper. On the other hand loan funds are generally less costly at the beginning but considering interest factor it becomes costly later on. However, the availability of finance is also a leading factor, because all the units cannot get easy money from the market by way of loans or bonds. In these circumstances owners capital or equity becomes most favourable.