Status: To Do
Financial instruments are fundamentally assets that can be bought and sold in a marketplace (sometimes with restrictions). Financial resources (REA) that can be bought and sold should have a consistent treatment across FIBO.
Contracts are agreements involving multiple parties that confer rights and obligations to the parties of such agreements. Some contracts provide for the rights and obligations to be transferable or tradable. The rights or obligations conferred by a contract can, with some restrictions, be transferred to others – bought or sold. All contracts have multiple parties with different (usually counterbalancing) rights and obligations.
Financial instruments are created by way of a particular kind of contract by conferring such rights to one of the parties of the contract – the buyer of the instrument. When the buyer buys the instrument there is a corresponding obligation on the part of the issuer. Thus the financial instrument is created by the contract, it is not the contract itself. The contract is also evidence of the financial instrument. Since the contract has multiple parties it makes no sense to say the “contract is purchased”. In the financial industry there is a convenient slang of “buying a contract”, but this is, in reality, buying one position in a contract issued by another.
For example, an equity is issued by a corporation (using a contract) and confers ownerships of a portion of that corporation to the buyer. The ownership, as an asset, can be traded. There is a contract backing the ownership but the ownership and the contract are not the same thing. Ownership of a corporation is like any other kind of ownership, such as owning a horse. Horses, unlike stocks, do not come into existence by way of a contract but the ownership can be transferred by a contract. There is something in common between horses , gold, and stocks – they are both resources that can be bought and sold.
It is therefore incorrect for “financial instrument” or “debt instrument” to subclass “Contract”, they should subclass “Financial Resource”. A financial instrument is created by a contract, conferring ownership or credit to the buyer.
There are further requirements on a financial instrument, that it is fungible and negotiable. There may be limits on the trading of a financial instrument after it is purchased. Here is a definition:
Investopedia: that holds some type of monetary value. It represents an in a corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity's bond), or rights to ownership as represented by an option.
Financial instruments are assets that can be traded. They can also be seen as packages of capital that may be traded. Most types of financial instruments provide an efficient flow and transfer of capital all throughout the world's investors. These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one's ownership of an entity.