Types of Financial Instruments

"Don't put your eggs in one basket" is fine —but which financial instruments are there?

By Andrew Moran

Edited by Dragan Stevanovic

Published May 21, 2024.

Different icons for financial instruments and man holding a smartphone

In the world of stocks, bonds, CFDs and other investment vehicles, diversification could help in achieving long-term portfolio objectives and managing risks.
When investors are diversifying their trading accounts, financial instruments play a critical role. The widely accepted diversification approach is to use different types of financial instruments, instead of guessing that a single instrument might be potentially profitable.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves.
» Still wondering about long position vs. short position? Learn stock trading essentials.
Financial Instruments OverviewExploring financial instruments boils down to evaluating four parameters: 
Liquidity 
Return 
Risk
Time horizon 
By knowing these attributes, you can make informed decisions, in line with your financial objectives. Diversification allows you to spread risk, combine various attributes, and optimize your overall account.
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SecuritiesSecurities are the most common financial instrument in the financial markets and represent ownership or debt in an instrument. 
Stocks and bonds are primary examples of securities. The former represents ownership in a company, while the latter is a debt that a company or government owes to the bondholder.
1. CFDs﻿Contracts for differences (CFDs) are financial derivatives that let traders speculate on the price movements of various underlying instruments, such as stocks, commodities, indices, or currencies. 
Always remember that with CFDs, you never own the underlying instrument that you are speculating on.
2. StocksStocks represent ownership stakes in companies like Apple or Tesla Motors.  A single unit of ownership in one company is called a share. 
Stockholders or shareholders will usually receive voting rights and might receive monthly or quarterly dividends if the company distributes profits.
» Learn to calculate annual percentage yield﻿
3. Bonds﻿Bonds are debt securities issued by governments, municipalities, or corporations to raise capital and fund expansion, infrastructure, or service debts. 
The lender (bondholder) will receive regular interest payments on top of the principal upon maturity.
4. Mutual FundsMutual funds are professionally managed investment vehicles that pool money from various investors to buy a diversified portfolio of stocks, bonds, or other securities. 
Mutual funds differ from exchange-traded funds (ETFs) because you cannot buy and sell shares (or units) of mutual funds throughout the trading session. Instead, you will obtain a stake at the start or at the end of a business day.
» Discover fundamentals of CFD trading (with examples)﻿

Types of Financial Instruments

Financial Instruments Overview

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Securities

1. CFDs

2. Stocks

3. Bonds

4. Mutual Funds