Only today: since I entered the investment industry, I’ve felt that financial instruments are basically like, “You have to understand them well—otherwise you might lose money without even realizing it,” so I went and studied this in depth.

Simply put, financial instruments are “contract documents” that tell us what rights we have in that asset. For example, if we hold stocks, it means we have a share in the company. When the company makes a profit, we receive dividends. That’s how it works.

What you need to know is that financial instruments mainly come in two big types: complex and non-complex. Complex ones, such as derivatives or convertible bonds, are suitable for people who already have experience, because the risk is extremely high. As for non-complex ones—like stocks, bonds, or mutual funds—they’re more suitable for beginners.

Let’s look at the different types. Equity instruments such as stocks give owners the right to a portion of the company. Common stocks come with voting rights at shareholder meetings. Preferred stocks have no voting rights, but they receive dividends first. Then there are warrants, which give the right to buy stocks at a set price.

Debt instruments such as bonds are considered more stable than stocks, because they are loans from the government or companies. Bondholders receive interest payments regularly, and when they reach maturity, they get the principal back. Corporate bonds are bonds issued by private companies. Bills are short-term debt instruments with a term of no more than 1 year.

Derivatives require extra caution. Futures are forward contracts for buying or selling at a future date. Options give the right to buy or sell in the future, but they are not mandatory. Swaps are contracts for exchanging cash flows. These carry extremely high risk.

There are also mutual funds (Mutual Funds) that pool money from many people to invest. ETF (Exchange Traded Funds) can be traded on stock exchanges. REITs (Real Estate Investment Trusts) invest in real estate.

The key point about any financial instrument with the following characteristics is that you must pay close attention: high-risk stocks but with good returns; low-risk bonds but with lower returns; medium-risk ETFs; and for CFD, you need to be careful about leverage.

The advantages of financial instruments are that we have many options, can diversify risk, have high liquidity, and can earn income steadily—for example, from bond interest. The disadvantages are that they involve risks from volatility, the complexity of certain types of instruments, the risk of default, and a lot of fees.

How to choose the right instrument: first set your goals—whether you want stable income, long-term growth, or risk protection—then evaluate the level of risk you can tolerate, the investment time horizon, and your own knowledge.

For trading: stocks are suitable for those who want long-term investment in companies with potential. Forex is suitable for short-term trading. Futures can help hedge risk. CFD provides flexibility for trading different types of assets. ETFs are good for diversification.

A word of caution for beginners: don’t invest without studying. Start with a small amount of capital. You should not use leverage that is too high, because you could lose far more actual capital than what you put in.

Overall, financial instruments are the key to investing, but you must understand them well—choose what fits you, not what other people want. Get to know the instruments before investing, and remember: investing always involves risk.