Hello and welcome to part 2 of this 3 part blog series on the basics of finance.
This post is all about key financial instruments. We will cover, liquid assets and transactions; various savings accounts, stocks and shares, and bonds.
So, let’s start at the beginning …
What are Financial instruments?
Financial instruments are products we buy in the marketplace as savings tools.
They are what we use to pay for things right now. Cash would be the most liquid asset as we use it to pay for direct transactions between individuals. Generally, You can negotiate a better deal when you pay by cash, for example, when you buy a car or pay for a house.
Liquid transactions generally happen via your current account. Current accounts allow unlimited monthly transactions. You can access your money from your current account by using your debit card, withdrawing cash from an ATM or via BACS (online electronic exchange).
These accounts tend not to pay interest and if they do they are very small amounts.
Savings accounts allow you to earn interest. They differ from current accounts as they don’t offer special features, like paying bills, debit cards or rewards.
Instant access savings accounts
Instant access or easy access savings account is a bank account for your savings in which you can take out money instantly. It’s more flexible than some savings accounts and you can earn a small amount of interest.
Notice savings accounts are slightly different instant-access accounts. They pay a slightly higher interest rate, however, the downside is that you must give notice if you want to withdraw your money. The notice period can range from one day to 30, 60 or 90 days ahead. If you withdraw money without giving notice you usually face a penalty and lose some interest.
Stocks and Shares
Stocks are a financial instrument used to provide capital (money) to a business and a “Stock” is just another word for a “share”. When we buy shares we buy a share of ownership in a company. For example, if a company issues 100 shares and you buy 1 of them, you own 1/100th, or 1%, of the company.
A Savings bond of this type is a fixed-term loan from you to the bank (the bond issuer). You’ll usually get a higher interest rate from a saving bond than you would from traditional savings accounts. Bonds have a maturity date which is agreed between you and the bond issuer, this is the date you get given back the money you invested and any interest you are due. This mode of investment is considered safer than stock and shares and it is less volatile.
So, that’s our whistle-stop tour of financial instruments.
The next post will be a third and the final post will learn about credit.
Have you learned anything new from these posts?
Is there anything you’re unclear about?
If so, pop a comment n the comment box and I will try to help you