financial instrument

So when someone says they want to 'invest' but they are not sure what they are actually buying, what exactly are they buying? That is the honest question, and the honest answer is that they are buying a financial instrument.

A financial instrument is simply an agreement that stands in for money or a claim on money. It is not the money itself. It is a piece of paper, or these days a digital entry, that says something like this: whoever holds this is owed something, or owns a piece of something.

Your cheque book is one. A cheque is a financial instrument that instructs the bank to move money from your account to someone else's. Your ordinary shares in a company listed on the Nigerian Exchange are another. They say you own a slice of that company. A Treasury bill you bought through your bank is another still. It says the government owes you a fixed sum on a fixed date.

Someone in Manchester sending money to family in Enugu through a diaspora remittance app is using a financial instrument too, even if they never think of it that way. The transfer itself, the record that money is owed and will arrive, is the instrument. The naira that lands in the account is the outcome.

Financial instruments come in families. Some, like shares, make you a part owner and your fortunes rise and fall with the business. Others, like bonds and Treasury bills, make you a lender and you are simply owed a fixed return. Others, like cheques and derivatives, exist to move or manage risk rather than to hold long term.

Once you see that a share, a bond, a cheque and even an insurance policy are all just different flavours of the same idea, the whole world of investing stops feeling mysterious. You are always just asking one question. What exactly does this piece of paper promise me?