Any financial instrument that confers on its holder a residual interest in the net assets of an entity (its assets after deducting all its liabilities). This also includes derivative instruments (options and warrants) that are linked to and settled by the delivery of such an instrument. In accounting practice, a financial instrument is classified as an equity instrument if the instrument includes no contractual obligation to pay cash or deliver a financial asset to others. Additionally, if the instrument will or may be settled in the entity’s own equity instruments, it will be classified either as a non-derivative instrument, or a derivative instrument.

By nature, a non-derivative instrument entails no contractual obligation for the issuing entity to deliver a variable number of its own equity instrument (shares of stock). Whereas a derivative instrument entails settlement by the issuing entity- which exchanges a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.