Financial Assets

Financial assets can be defined as investment assets whose value is derived from a contractual claim of what they represent. These are liquid assets as the economic resources or ownership can be converted into matter, such as cash. These are also referred to as financial instruments or securities. They are widely used to finance real estate and ownership of tangible assets.

These are legal claims, and these legal contracts are subject to future cash at a predefined maturity value and predetermined time frame. These are a crucial part of any organization. It always needs to have a good record of its financial assets list to be put to use whenever needed, like in financial emergencies.

Financial assets are a crucial component of an individual's or organization's wealth and investment portfolio. These assets are a broad category that encompasses a variety of instruments designed to generate economic value over time. They can be easily converted into cash and traded in the financial markets. Understanding financial assets is essential for making informed investment decisions.

Financial assets typically fall into several key categories, including equities (stocks), fixed-income securities (bonds), cash and cash equivalents, and alternative investments like real estate investment trusts (REITs) and commodities. Each of these asset classes carries its own level of risk and potential return.

Equities represent ownership in a company and are traded on stock exchanges. Investing in stocks can provide the opportunity for capital appreciation and potential dividends.

Fixed-income securities, such as bonds, represent loans made by investors to corporations or governments. They pay periodic interest and return the principal amount at maturity.

Cash and cash equivalents include liquid assets like bank deposits, money market funds, and short-term government securities. They provide safety and liquidity.

Investors allocate their resources among these asset classes based on their financial goals, risk tolerance, and time horizon. The goal is to create a diversified portfolio that maximizes returns while managing risk.

Hence, financial asset management is the building blocks of wealth and investment, and understanding them is fundamental to achieving one's financial goals. Balancing the various asset classes in a portfolio is a strategic approach to secure financial well-being.

Let us understand the different types of assets in the financial assets list through the detailed explanation below.

#1 - Certificate of Deposit (CD)

This financial asset is an agreement between an investor (here, a company) and a bank institution. The customer (Company) keeps a set amount of money deposited in the bank for the agreed term in exchange for a guaranteed interest rate.

#2 - Bonds

This financial asset is usually a debt instrument sold by companies or the government to raise funds for short-term projects.A bond is a legal document that states the money the investor has lent the borrower, the amount it needs to be paid back (plus interest), and the bond's maturity date.

#3 - Stocks

Stocks do not have any maturity date. Investing in stocks of a company means participating in the company's ownership and sharing its profits and losses. Stocks belong to shareholders until and unless they sell them.

#4 - Cash or Cash Equivalent

This type of financial asset is the cash or equivalent reserved with the organization.

#5 - Bank Deposits

These are the cash reserve of the organization with Banks in saving and checking accounts.

#6 - Loans & Receivables

Loans and Receivables are those assets with fixed or determinable payments. For banks, loans are such assets as they sell them to other parties as their business.

#7 - Derivatives

Derivatives are financial assets whose value is derived from other underlying assets. These are contracts.

All the above assets are liquid assets as they can be converted into their respective values as per the contractual claims of what they represent. They do not necessarily have inherent physical worth like land, property, commodities, etc.

There is no single measurement classification technique suitable for all these assets. However, they can be classified as Current Assets or Non-Current Assets on a company's balance sheet.

#1 -  Current Assets

It contains those investment assets which are short-term in nature and are liquid investments.

source: Microsoft.com

#2 - Non-Current Assets

Non-Current assets like shares of other companies or debt instruments held in the portfolio for more than a year.

source: Microsoft.com

Now that we understand the basics, types, and classification of financial assets management, let us apply the theoretical knowledge to practical application through the examples below.

Example #1

Elton, a software engineer had saved $10,000 and already had a significant exposure in the stock market. To diversify his overall portfolio and ensure efficient risk management, he decided to invest in government bonds.

However, he planned to move to a bigger house in two years. Hence, he chose the bond with a similar time frame. Since his goal was fixed and in the short term, investing in the stock market or any other commodity might have been too much risk.

Therefore, he went with the bond with a fixed interest that would be paid at maturity.

Example #2

According to a national-level cross-sectional study called the Indian Human Development Survey in 2011-12. This survey studied the role of the availability of bank branches in influencing their customers’ investment in risky financial assets.

It was found that out of 1000 households, at least two would invest in risk assets if there was a bank branch present within a 5 Km radius of their home. This study not only examines the availability of a bank but also the availability of information and support.

Let us understand the advantages of financial assets list through the points below.

• Some of these assets, which are highly liquid, can easily be used to pay bills or to cover financial emergencies. Cash and cash equivalents come under this category. On the other hand, one may have to wait for the stock to get money as they have to be sold in exchange first, followed by settlement.
• It gives investors more security when they have more capital parked in liquid assets.
• It serves as a major economic function of financing tangible assets. It becomes possible with the transfer of funds from those who have a surplus of it to where it is needed for such financing.
• Financial assets distribute the risk as per the preferences and risk appetite of the parties involved in the intangible asset's investment. It represents legal claims to future cash expected generally at a defined maturity and rate. The counterparties involved in the agreement are the company that will pay the future cash (issuer) and the investors.

Despite the various advantages mentioned above, there are a few factors from the other end of the spectrum that prove to be a disadvantage. Let us understand them through the points below.

• Financial assets (liquid assets) like deposits in savings accounts and checking accounts with banks are greatly limited in their return on investment, as there are no restrictions for their withdrawal.
• Furthermore, these assets like CDs and money market accounts may prevent withdrawal for months or years as per the agreement, or they are callable.
• It comes with a maturity date in the contract; attempting to cash out assets before maturity calls for penalties and lower returns.

Let us understand the differences between financial assets and real assets through the comparison below.

Financial Assets

• Financial assets refer to intangible assets with monetary value, typically represented by legal ownership or a contractual claim. These assets can include stocks, bonds, cash and cash equivalents, and alternative investments.
• Financial assets are highly liquid, meaning they can be readily converted into cash. They are actively traded on financial markets, making it easy for investors to buy and sell them.
• Different types of financial assets come with varying levels of risk and potential return. For example, stocks offer the potential for capital appreciation and dividends, while bonds provide fixed interest payments.
• Market conditions, interest rates, and economic factors influence financial assets. They can be subject to price fluctuations due to changes in supply and demand.
• Investors often diversify their portfolios by allocating resources among different financial asset classes. This strategy helps spread risk and optimize returns.

Real Assets

• Real assets encompass physical properties like real estate, infrastructure, natural resources, and tangible items such as collectibles and art.
• Real assets derive their value from their utility, scarcity, and demand in the real economy. They often serve practical purposes or have inherent worth.
• They tend to be less liquid compared to financial assets. Selling real assets may take time and involve a more extended investment horizon.
• Real assets can act as a hedge against inflation. They may retain or increase in value as the general price level of goods and services rises.
• They are not as directly influenced by financial market conditions, making them less susceptible to market volatility.

This article has guide to what are Financial Assets. Here we explain its types, examples, advantages & disadvantages, and compare it with real assets. You may also learn more about the following articles –

• Financial Assets Examples
• Current Assets vs. Non-Current Assets
• Quick Assets Overview
• What are the Non-Performing Assets (NPA?