Welcome to the next installment of our “101” series where we cover the basics of the intersection of equity crowdfunding and finance. As we’ll get into offering types soon, it’s important to note the difference between the two. Financial instruments can be thought of as the broad buckets into which the different offering types fall under. This isn’t an all-inclusive list, but simply a short one to educate and further deepen the common investor’s financial knowledge.
Financial instruments are generally broken into cash instruments or derivative instruments and even categorized by “asset class.” As it can get unduly complex, we’ll simply get over the different instrument types, especially ones the ones most related to equity crowdfunding.
Bond: A financial instrument issued by governments or corporations in order to raise money. Bonds are a debt security wherein the issuer (typically governments or corporations) owes the holders a debt that typically requires the issuer to pay the holder interest at a later date.
Loans: Similar to bonds except loans are generally perceived as agreements between banks and everyday consumers/customers. Additionally, bonds are traded quite often whereas loans are non-tradeable.
Derivatives: Instruments which derive (hence the name) their value from the value and characteristics of one or more underlying entities such as an asset, index, or interest rate. Common derivatives include futures, options, swaps, and many more.
Equity: Equity is simply the ownership of assets in a company. For example, you can say, “I have equity in Facebook,” meaning you own a part of Facebook.
Share: Shares are the units of ownership in a company. Using the previous example, you can say, “ I own one share in Facebook”, but not, “I own one equity in Facebook.”
Stock: Stocks represent the ownership of shares in a company. Collectively, all the shares of a company are known as stock. Again, using the previous examples, you can say, “I have one share of stock in Facebook,” because you don’t own the entire stock of Facebook.
This list covers the major financial instruments in finance. It is not meant to be an exhaustive list of financial instruments available, but meant to deepen the new investors’ knowledge of finance. If interested in an in-depth definition and list, you can read this article.
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About: Francis Vu
An investment professional with a background in private equity and venture capital having spent time conducting investments at VU Venture Partners and Pacific Oak LLC with a finance and management degree from Tulane University.