Characteristics of Financial Instruments
The important characteristics of financial instruments are enumerated as below:
a) Liquidity: Financial instruments provide liquidity. These can be easily and quickly converted into cash.
b) Marketing: Financial instruments facilitate easy trading on the market. They have a ready market.
c) Collateral value: Financial instruments can be pledged for getting loans.
d) Transferability: Financial instruments can be transferred from one person to another.
d) Maturity period: The maturity period of financial instruments may be short term, medium term or long term.
e) Transaction cost: Financial instruments involve buying and selling cost. The buying and selling costs are called transaction costs.
f) Risk: Financial instruments carry risk. Equity based instruments are riskier in comparison to debt based instruments because the payment of dividend is uncertain. A company may not declare dividend in a particular year. However, payment of principle or interest is more or less certain unless the company gets insolvent.
g) Future trading: Financial instruments facilitate future trading so as to cover risks arising out of price fluctuations, interest rate fluctuations etc.
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