Financial instruments are legal documents that embody monetary value. There are a number of different types of documents that are properly identified as a financial instrument. Under the broad heading of a financial instrument, some would be classified as cash instruments or derivative instruments.

When most people think in terms of a financial instrument, they tend to identify what is commonly known as a cash instrument. This type of financial instrument is simply those documents that are recognized as cash that can be utilized for various transactions. Currency is the most easily identified of all cash instruments, although such documents as checks or funds transfers from bank accounts would also be understood to be a financial instrument of this type.

Derivative instruments are another example of the financial instrument. This classification would include such instruments as futures, options, and swaps. Some analysts also prefer to include stocks, bonds, and currency futures within this category as well, while others tend to think of these instruments as cash equivalents, since it is possible to settle debts by transferring ownership of stocks and bonds. In broad terms, a derivative instrument is some type of contract that has value based on the current status of the underlying assets.

Other types of documents are often understood to function as a financial instrument. In the world or real estate funding, the mortgage qualifies as a financial instrument. A commercial paper or stock index also meets the basic definition. Bills of exchange are usually recognized as a financial instrument as well.

A financial instrument may be a hard copy document, or exist as a virtual document. Currency and checks would represent physical documents that represent specific monetary values and are freely used for transactions. Funds transfers between bank accounts would be an example of a virtual financial instrument. In like manner, stocks and bonds may exist as hard copies or as virtual records that assign rights and privileges to a specific investor.