The term Financial Instruments here means any obligation of financial value which is incorporated in an instrument either electronic or physical.

As a trader you can go it the old fashioned way, like a horse trader by buying the horse, pay for it and then turn around and sell it at a higher price. Professional horsetraders have also credit lines because the more professional the more expensive the horses become and the volume makes it difficult to maintain a buy/sell on a cash basis (which I understand is still very much the base for a professional horse trader).

Now in the arena of financial instruments of any kind the technology and developed professional knowledge allows buy/sell transactions almost immediately and if done in high volumes and on an enhanced credit base it can provide the trader with a large profit margin if he knows what he is doing. Since the transfered instruments are booked immediately the whole transaction works well if everything goes smoothly. The actual settlement of the transaction usually takes some time (either T (Transaction day) +1, or +3 or +7 or +10 or whatever the executing participants agree on, but that does not mean trouble since the booking is electronic and no actual paper is issued and delivered.

However the problem for the trader is the same as it is for the horsetrader, he needs the sell part to work and the buy part to be executed without fail.

Lets say our horsetrader buys the horse and sells it to X and X is delayed in paying. The horsetrader is stuck with his horse for the intermediary time. If he bought the horse on credit which was extended for one day only he will have to either cover the credit (margin call), have it extended (costs a penny and needs evaluation of the horse value) or sell the horse otherwise (as a firesale probably with lower profit).

The same for the financial trader, whatever he buys he needs the handling party to either extend the credit, sell otherwise or pay the piper. Since most of the actual financial traders use credit arrangements to enhance the volume of their transactions the risk can multiply. Depending on the enhancement and the kind of financial instrument traded the risk can be very high. It is named: Address Risk and describes the risk of performance of contractual partners.

Now banks or financial institutions like to see the traders because they generate fee income which is different than interest. Therefore they support the traders with credit arangements and enhancements. The rules are almost everywhere different but a good ban, depending on its experience with the trader will base his available volume on the account relation. They like to see at least 25% real cash value (liquid), 25% investment grade securities, 10% value neting and 40% illiquid assets. The mix very much depends on the kind of financial instruments traded.

The trader in order to achieve this in his own interest and for profit usually does it either on own account (means he has the wealth) or uses third parties. In case of third parties he looks for participants who bring in what the bank asks for to unlock the credit. Depending on how much risk is actually taken by the participating investors, they receive a fee, calculated per transaction, booked as investment income.

Now in the case of Assets the trader needs to have the evaluation dones and depending on the kind of asset and the category of the asset that can be tricky. Banks also usually only reward the asset with a value at least 10% under the lowest evaluation and since the trader bases his available credit limit in transactions on that bank fixed value he will base the fee for participating asset investors only at that value.

In other words, if you have Diamonds for a wholesale price of 100M USD (which would be about 240M in retail) the available value would probably be 90M USD minus a volatility factor, you probably end up with 80M USD in credit base value, depending where the diamonds are. In assets the location is a major factor. Diamonds in Kongo will be evaluated different than in Antwerp, Belgium, Real estate in India different than in Germany or Monaco, Mangan on the ground of the pacific ocean different than in a warehouse in California etc..

So lets say our diamond asset is in Antwerp, Belgium, that would mean a premium market, high volatility but immediate available cash when the bank has to sell (in case of a margin call (yes I have seen this happening)) and the papers allow them to get their hand on the diamonds (because preferrably they are in their vault). The trader would pay the investor on the basis of the value he has made available, means in our example on 80M USD and not 240 MUSD.

If however the asset here (diamonds) would be in Kongo and in a warehouse, the possible value from a bank would probably tend to be somewhere at 10%, means 10 M USD if it would be accepted at all. The bank will accept such high risk assets only when either the address risk is very low (the traded instrument can be used as collateral and is good for a short bridge period (very costly arrangement)) or the trader has enough financial resources to cover a possible risk period of credit exposure.

Anyone who uses his assets for investment needs to know that there is a risk and it can realize itself and he needs to understand that the value attached to the asset is not marketvalue but "possible immediate sale"-value.

A last word of advise: Do not gamble with what you can not afford to loose or what is not yours!