What are financial instruments? Asset classes, derivatives and how retail traders access them

A financial instrument is a contract that has a monetary value and can be bought, sold or settled. Some instruments give you a direct claim on an asset, such as a share in a company or a bond issued by a government; others, called derivatives, are contracts whose value depends on the price of something else, such as an index, a commodity or a currency. For a retail trader, the instrument you choose decides what you own, what you pay, how much you can lose and who is on the other side of the trade.

This guide is the starting point for the Instruments section of The Pip Report. It explains the main asset classes, the difference between cash instruments and derivatives, the ways retail traders actually access each market, and how the risks compare. Later guides go deeper into each product.

Asset classes and instruments are not the same thing

It helps to separate two ideas that are often mixed up.

• An asset class is a group of underlying things with similar economic behaviour: company ownership (equities), loans (bonds and money markets), currencies, physical commodities, property and, more recently, crypto-assets.
• An instrument is the legal and practical wrapper you use to get exposure to that asset class: a share, a fund unit, an exchange-traded fund, a futures contract, an option or a contract for difference.

The same asset can be reached through several instruments. You can get exposure to the S&P 500 by buying an index fund, by buying an ETF, by trading an index future on an exchange, by buying an option on that future, or by trading an index CFD with a broker. The underlying economic exposure is similar, but the costs, the leverage, the ownership rights and the worst-case loss are very different. Much of the confusion beginners have comes from comparing assets ("is gold riskier than shares?") when the bigger difference is often the wrapper ("is a leveraged gold CFD riskier than an unleveraged share holding?").

The main asset classes

Equities (shares)

A share is a slice of ownership in a company. Shareholders have a residual claim: they get what is left after the company has paid its suppliers, staff, lenders and tax. That residual claim is why share prices respond to earnings, expectations about future growth and interest rates. Shares are listed and traded on stock exchanges such as the New York Stock Exchange, Nasdaq, the London Stock Exchange or Deutsche Börse's Xetra. Our guide to how stock markets work covers listing, order books and settlement.

A stock index is not itself something you can buy; it is a calculated number that tracks a basket of shares, such as the S&P 500, the FTSE 100 or the DAX. Traders gain exposure to an index through funds, ETFs, futures, options or CFDs. See what is a stock index.

Bonds and money markets

A bond is a loan to a government or a company. The issuer pays interest (the coupon) and repays the face value at maturity. Bond prices move inversely to yields: when market interest rates rise, existing bonds with lower coupons become less attractive and their prices fall. Government bond yields matter well beyond the bond market itself, because they act as a benchmark for borrowing costs and influence both currencies and equity valuations. Our guide to bonds and yields explains duration and the yield curve.

Currencies

The foreign exchange market is where currencies are swapped for one another. It is the largest financial market in the world by turnover: the Bank for International Settlements' 2025 Triennial Survey put average daily turnover at around 9.6 trillion US dollars. Currencies are always quoted in pairs, and most retail currency trading happens through rolling spot contracts or CFDs. The Forex section covers this market in depth, starting with how the forex market works.

Commodities

Commodities are physical raw materials: energy (crude oil, natural gas), metals (gold, silver, copper) and agricultural products (wheat, coffee, sugar). Prices are set mainly in futures markets, because storing and moving physical goods is expensive and specialist. Precious metals behave differently from industrial ones; see gold and silver explained and oil trading explained.

Crypto-assets

Cryptocurrencies such as Bitcoin and Ether are digital tokens recorded on public blockchains. They trade around the clock, are highly volatile and, outside the EU's MiCA framework, are largely unregulated as assets. They have their own section on this site, starting with what is cryptocurrency.

Property and alternatives

Real estate, private equity, art and similar assets are usually reached by retail investors indirectly, through listed property companies, real estate investment trusts or funds. They are mentioned here for completeness; this site focuses on liquid, exchange-traded or broker-quoted markets.

Cash instruments and derivatives

The most useful single distinction in finance is between instruments that are claims on an asset and instruments that are bets on, or hedges against, its price.

Cash instruments

A cash instrument (sometimes called a cash or spot product) has its value set directly by the market for that instrument. Shares, bonds, fund units and ETF units are cash instruments. If you buy a share you pay its full price, you own it (usually through a nominee or custodian), and the most you can lose is what you paid. Holding it costs little beyond any platform or custody fee.

Derivatives

A derivative is a contract whose value is derived from something else: an underlying asset, index, rate or price. The main families are:

• Futures: standardised exchange-traded contracts to buy or sell an underlying at a set price on a future date. Both sides post margin with a clearing house.
• Options: contracts giving the buyer the right, but not the obligation, to buy (a call) or sell (a put) an underlying at a set price before or on a set date. The buyer pays a premium; the seller collects it and takes on the obligation.
• Swaps: agreements to exchange cash flows, such as fixed for floating interest payments. These are mostly used by institutions.
• Forwards: customised, over-the-counter versions of futures, common in currency hedging by companies.
• Contracts for difference (CFDs): over-the-counter contracts with a broker to exchange the difference in an underlying price between opening and closing. Our guide to what is a CFD covers the mechanics.

Derivatives exist for good reasons. Airlines hedge fuel costs with oil futures, exporters hedge currency receipts with forwards, and fund managers use index futures to adjust exposure quickly. The same features that make them useful for hedging, chiefly leverage and the ability to go short, also make them dangerous for speculators who use them without a plan.

Exchange-traded versus over-the-counter

A second distinction cuts across the first.

• Exchange-traded instruments, such as listed shares, ETFs, futures and listed options, trade on a regulated venue with published prices and volumes. Trades are usually cleared by a central counterparty, which stands between buyer and seller so that neither is exposed to the other's default.
• Over-the-counter (OTC) instruments, such as CFDs, rolling spot forex and most forwards and swaps, are bilateral contracts. With a CFD, your counterparty is your broker; the price you see is the broker's quote, usually based on the underlying market.

Neither is automatically better, but OTC products put more weight on the quality and regulation of the firm you deal with. Our guide to how to check a broker licence explains what to verify.

How retail traders access each market

In practice, a retail trader in the EU or UK has five main routes.

1. Buying shares directly

Through a stockbroker or investment platform you buy shares on an exchange. You pay a commission or a dealing fee, sometimes a currency conversion fee for foreign shares, and in some countries a transaction tax. You can receive dividends and, depending on the platform, vote at shareholder meetings. There is no leverage unless you take out a margin loan.

2. Funds and ETFs

A fund pools money from many investors and holds a portfolio. Exchange-traded funds are funds whose units trade on an exchange like shares, so their price moves during the day. They offer cheap diversification: one ETF can track hundreds of shares or bonds. In the EU, most ETFs sold to retail investors are UCITS funds, and the PRIIPs rules require a key information document, which is why many US-domiciled ETFs are not offered to EU retail clients. See ETFs explained.

3. Exchange-traded futures

Futures give leveraged exposure to indices, bonds, commodities and currencies with transparent exchange pricing. The trade-off is size: standard contracts are large, although exchanges have introduced smaller "micro" contracts on several major indices and commodities. Futures expire, so a position held for months has to be rolled from one contract month to the next. Our guide to how commodity futures work explains expiry, rollover and contango.

4. Options

Buying an option gives defined risk (the most you can lose is the premium paid) with leveraged upside, but options lose value as time passes and their pricing depends on volatility as well as direction. Selling options collects premium but can expose the seller to large losses. Options are powerful and complex; retail access in Europe is mainly through exchange-listed options, and some brokers also offer option-like OTC products.

5. CFDs

For many retail traders in Europe, Australia and elsewhere, CFDs are the most common way to trade indices, commodities, currencies and individual shares on margin. A single account gives access to thousands of markets, positions can be long or short, and sizes can be small. In exchange, you pay overnight financing on leveraged positions, you own nothing, and you rely on the broker as counterparty. Retail CFDs in the EU and UK are subject to leverage caps, a 50% margin close-out rule and negative balance protection. How CFD terms differ by asset class is covered in CFDs on stocks, indices and commodities. CFDs are not available to retail clients in the United States.

The risk ladder

Risk is not a single number, but it is possible to rank instruments by the features that most often cause large losses for individuals. From lower to higher, a rough ladder looks like this:

1. Cash and short-term government bills. Small price moves; the main risks are inflation and, for foreign currency holdings, exchange rates.
2. Government bonds held to maturity. Prices fluctuate with rates, but a bond from a creditworthy issuer held to maturity returns its face value.
3. Diversified funds and broad index ETFs. Exposed to market falls, sometimes large ones, but spread across many companies, with no leverage.
4. Individual shares. Company-specific risk on top of market risk. A single company can lose most or all of its value.
5. Bought options. The maximum loss is the premium, but losing the whole premium is a common outcome.
6. Futures and leveraged ETFs. Leverage magnifies moves, and futures margin calls can require more money at short notice.
7. CFDs and rolling spot forex. Leveraged, OTC, with ongoing financing costs. Negative balance protection limits retail losses to the account balance, but the account balance can be lost quickly.
8. Sold (written) options and unprotected short positions. Losses can, in principle, be very large relative to the premium or margin.

Two cautions. First, the asset class matters within each step: a CFD on a volatile small-cap share is riskier than a CFD on a broad index at the same leverage. Second, how you use an instrument can matter more than where it sits on the ladder. A small CFD position with a sensible stop can risk less money than an undiversified share portfolio. The ladder is about the features that can hurt you, not a ranking of what anyone should choose.

Worked example: same exposure, three wrappers

The numbers below are illustrative only and do not reflect any particular broker's prices.

Suppose a trader wants exposure of 10,000 euros to a large European share trading at 100 euros.

Option A: buy 100 shares.

• Cash paid: 10,000 euros plus, say, a 10-euro commission.
• If the share falls 20% to 80 euros, the position is worth 8,000 euros: a loss of 2,000 euros, or 20% of the money committed.
• There is no financing charge, and dividends are received as cash.

Option B: a share CFD at the maximum retail leverage of 5:1.

• Margin required: 20% of 10,000 euros, or 2,000 euros.
• The same 20% fall produces the same 2,000-euro loss, which is now 100% of the margin committed. In practice, the broker's 50% margin close-out would likely close the position before that, crystallising the loss.
• Holding for a year at an illustrative financing rate of 6% a year would cost around 600 euros on top.

Option C: an index future on a broader market.

• The trader cannot match 10,000 euros exactly, because futures come in fixed sizes; a standard index future may represent exposure far larger than 10,000 euros.
• Daily gains and losses are settled in cash against the margin account, and a margin call can require more money the next day.

The underlying move is identical in each case. What changes is how much money is put up, how quickly a loss can consume it, and what it costs to hold. Our margin calculator and profit and loss calculator let you run your own versions of these sums.

What drives prices in each asset class

Each asset class responds to a different mix of forces. Knowing the main drivers helps you understand what you are exposed to before you take a position.

• Shares: company earnings and guidance, sector trends, interest rates (which change the value of future earnings), and overall risk appetite.
• Stock indices: the same forces aggregated, with heavy weight on the largest companies in the index and on central-bank policy.
• Bonds: inflation, central-bank rates and expectations, government borrowing and credit quality.
• Currencies: interest-rate differentials, growth and inflation data, capital flows and risk sentiment. See what moves currency prices.
• Commodities: supply and demand, inventories, weather, geopolitics, the US dollar and, for gold, real interest rates and safe-haven demand.
• Crypto-assets: liquidity and sentiment, regulation, flows into products such as ETFs and, for some tokens, network-specific events.

Many of these drivers are connected. A surprise in US inflation data can move Treasury yields, the dollar, gold and equity indices within the same minute. That is one reason a trader holding several positions across asset classes may have more concentrated exposure than they think.

How regulation differs by instrument

In the EU, the Markets in Financial Instruments Directive (MiFID II) sets the framework for most of these products: shares, bonds, fund units, money-market instruments and derivatives, including CFDs, all fall within its list of financial instruments. Firms that deal in them must be authorised, classify clients as retail or professional, assess whether complex products are appropriate for each client and disclose costs.

Some practical consequences for retail clients:

• Complex products need an appropriateness test. Before you trade CFDs, futures or options, an EU broker must ask questions about your knowledge and experience and warn you if the product seems inappropriate.
• Product intervention applies to CFDs. ESMA's 2018 measures, now applied by national regulators such as CySEC, cap retail CFD leverage by asset class: 30:1 for major currency pairs; 20:1 for non-major pairs, gold and major indices; 10:1 for other commodities and non-major indices; 5:1 for individual shares and other assets; 2:1 for crypto-assets. Our guide to ESMA leverage limits and negative balance protection explains the full set of rules.
• Key information documents. Packaged products such as CFDs and many funds come with a standardised key information document summarising risks and costs.
• Investor compensation. If an authorised investment firm fails and cannot return client assets, an investor compensation scheme may cover eligible clients up to a limit. It does not cover trading losses.

Common mistakes when choosing an instrument

• Comparing assets instead of wrappers. Gold is not inherently "safe" and shares are not inherently "risky"; a leveraged gold CFD can lose money far faster than an unleveraged share holding.
• Ignoring holding costs. Financing on CFDs and roll costs on futures are small per day and large per year. A product built for short holding periods can be an expensive way to hold something for months.
• Assuming ownership. With a CFD you have no shares, no votes and no claim on the underlying asset, only a contract with your broker.
• Not checking trading hours. A share CFD only trades when its exchange is open, while an index CFD may trade nearly around the clock. Gaps between sessions can skip past stops. Our market hours tool shows when major exchanges are open in your time zone.
• Using the leverage cap as a target. Regulatory maximums are ceilings. Position size should come from how much of your account you are prepared to lose, as explained in our guide to position sizing.
• Overlooking currency exposure. Buying a US share or a dollar-priced commodity with euros adds an exchange-rate risk, plus conversion costs.

How to use the Instruments section

If you are new to markets beyond forex, a sensible reading order is:

1. This guide, for the map.
2. CFDs on stocks, indices and commodities, for how the terms change by asset class.
3. How stock markets work and stock CFDs versus real shares.
4. The index, commodity, bond and ETF guides, as your interests require.

Throughout, the glossary defines terms such as leverage, margin and liquidity, and our risk warning sets out the risks of leveraged trading.

Frequently asked questions

What counts as a financial instrument?

In general terms, any tradable contract with monetary value: shares, bonds, fund and ETF units, money-market instruments and derivatives such as futures, options, swaps and CFDs. In the EU, MiFID II sets out the legal list, which determines which products need an authorised firm to deal in them.

What is the difference between a cash instrument and a derivative?

A cash instrument, such as a share or a bond, is a direct claim whose value is set by its own market. A derivative is a contract whose value depends on another asset's price, rate or index level. Derivatives are usually leveraged and can be used to go short.

Are derivatives always riskier than shares?

Not always, but the features that cause large losses, leverage and the potential to lose more than an initial premium or margin, are found mainly in derivatives. A small, well-sized derivative position can risk less money than a large, concentrated share holding. The risk depends on size and leverage as much as on the product.

Which instruments can retail traders in the EU access?

Shares, bonds, UCITS funds and ETFs, listed futures and options, and CFDs, subject to appropriateness checks for complex products. Retail CFDs are subject to leverage caps, a 50% margin close-out and negative balance protection. Many US-domiciled ETFs are not offered to EU retail clients because they lack a key information document.

Is a stock index something you can buy?

No. An index is a calculated value that tracks a basket of shares. You gain exposure to it through an index fund, an ETF, futures, options or an index CFD, each with different costs and risks.

Why do most retail CFD accounts lose money?

Leverage magnifies losses, costs such as spreads and financing add up, and common behavioural mistakes make things worse. EU and UK brokers must publish the share of their retail CFD accounts that lose money, and the figures typically show a clear majority do. See why most retail CFD traders lose.