Instrument (Financial Instrument) definition

The term instrument refers to the asset which impacts, influences and at expiration is the source that is used for determining the settlement value for derivative contracts.

Usually, financial instruments are not leveraged (meaning their price reflects total cost). However, the derivative products based on these instruments may be leveraged. Leverage means that a trader can control a larger quantity of something by putting up only a fraction of the total cost (in the case of futures).

Another type of leveraged instrument is a derivative whose value goes up and down as the price of the instrument goes up and down (as with options or binary options). Such derivatives don't give the trader ownership or control of any actual product, but is based solely on the market price of the underlying financial instrument.

Leverage can result in powerful trading advantages, as long as the trader is able to manage risk and take positions that flow with the market’s price movement.

(See also  Underlying Market)

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