Ordinarily, when individuals are asked to declare all assets in possession they begin to count every valuable that can be seen or converted into cash. Actually, an asset is more than physical wealth.
Hence, we have other items that are not physical yet they provide value and generate economic benefits. Thus, as we have financial assets we also have non-financial assets.
There again, when asked; what are financial assets? People begin to think of land, property, and cash as the only assets that have monetary worth.
Therefore, it is important to understand here what financial assets means, in other to give us a clearer definition.
What are financial Assets?
Financial assets are liquid assets that lack inherent physical worth; they derive value from contractual rights or ownership. Examples are; Stocks, Bonds, mutual fund,s and more, these assets are intangible yet they generate revenue.
Every financial asset is mainly for investment purposes. They are those assets that investors typically collect and build a portfolio around them. When we talk of building an investment portfolio we look at these various assets and select them according to their asset classes.
In our previous articles, we discussed building a portfolio. We have also explained how to manage a portfolio.
Therefore, these publications might not be complete if we do not discuss what these financial assets are.
This is because achieving optimum investment goals demands collecting different financial assets and building a portfolio around them.
Financial assets example:
1. Stock
Stocks also called equities are one of the investment instruments investors purchase from a company as shares. They become shareholders and in return partake in the share of profit (dividend) and decision-making of the firm.
Investors can also sell those shares to other investors and gain profit. While on the other hand, these companies raise funds through sales of shares.
Stocks are one financial asset that yields high revenue but can also be risky.
2. Mutual Fund
A mutual fund is a financial asset that utilizes a portfolio of mixed assets like Bonds, stocks, mutual fund,s and more. Investors pool their capital to build this portfolio,
While the portfolio manager takes charge of the investments. The fund manager exercises expertise over the investment and makes sure that assets are rightly collected.
3. Cash and cash equivalent
These classes of financial assets typically consist of money market funds, savings account,s and other liquid instruments.
This is one most important assets class in investment with short-term investment. They consist of the physical cash you are holding at the moment and securities.
4. Bonds
Bonds are financial assets that are used by firms or governments to raise capital in the form of loans from investors. While the investors purchase the Bond in exchange for the fund.
The company in return pays interest to the investors annually or as agreed. Then at maturity, the company pays back the principal amount.
5. Derivatives
Derivatives are a financial contracts that acquires their value from the assets such as bonds, currencies, and stocks. This financial asset engages more parties based on the instruments.
While the rate of market volatility helps to measure the value of the assets. Some types of derivatives are forwards, futures, and swap options.
6. Real estate investment trusts (REIT)
REITs are companies that generate revenue through sponsoring or owing landed properties.
These companies purchase properties, put them on rentals, and acquire income from them. They deal in the sell of shares and investors buy those shares and earn profit from those proceeds.
7. Exchange-traded fund
These financial assets operate similarly to mutual funds. Different investors pool funds together to invest in different asset classes. It is liquid because like mutual fund, the shares are traded in the stock market.
Advantages of financial assets over physical assets
1. Financial assets do not depreciate
Depreciation is a gradual reduction in the value of assets. Hence, financial assets are liquid; they are not physical and cannot be touched.
Therefore, they do not experience such devaluation that arises from depreciation.
Thus, they may increase and decrease in price resulting from demand and supply in market volatility. But the value remains due to its inherent form.
2. Financial Assets are liquid
Unlike intangible assets, financial instruments like stocks, cash equivalent and more can generate revenue more easily. Due to its liquid nature, it makes transactions flexible within the financial market. The flexibility adds more value and easy assessment to funds.
3. Financial Assets are convertible
Investors can transact using the stock market, it serves as an avenue for stock conversion. Unlike physical assets which have no specific arena for a transaction.
Most financial assets like bank deposits, Bonds, stocks, and loans, can be converted into cash, and the cash is used for various expenses.
4. There is the ease of diversification
Financial assets provide an opportunity for easy diversification of asset classes. Hence, the liquid nature makes building and managing a portfolio less stressful as managers can carry out transactions within a location.
For instance, you can build a portfolio of bonds, mutual fund,s and cash within a geographical location and manage it effectively. It may not seem easy as this when building a portfolio that comprises physical assets.
5. Easy transfer of ownership
Investors can transfer ownership of assets more easily through electronic transactions. Having met all necessary approval from all concerned persons, the investor can move all ownership records very easily. This easiness of ownership transfer also helps to alleviate any task or changes in strategy by the new owner.
Disadvantages of financial assets over physical assets
1. Some financial assets can be risky
Sometimes managing financial assets can be risky, if you do not have enough knowledge of investment you may meet loss. Assets like stock and derivatives can generate high revenue but they are very risky investments.
To be successful you will need a good knowledge of portfolio management. This includes how you collect and invest these financial assets or you can employ the service of a portfolio manager.
2. Supply and demand can affect revenue
The supply and demand of various financial assets may either lead to a rise or fail in the price of a stock. When the price of stock rises they may be low supply and investors may not be able to buy.
So also when the price fails they may be high demand and investors may not make a profit. This condition can affect investors’ objectives, leading to a loss in investment.
3. Economic situation can hinder progress
The economic situation of any country can change at any time and this may affect liquid assets negatively. When this happens investors may have to expect a decrease in revenue because they may have to sell off stocks. This can lead to devaluation in stock as the price may become low.
Again, the economic condition can downplay the confidence of the investors causing them to decide not to invest. They can as well think of other options aside from investing in financial assets.
Bottom Line
In the financial world, financial assets are the most valuable resource for growing wealth. It provides good opportunities to both private investors and business organizations. Helping them generate revenue according to time horizon and their level of risk tolerance.
While we may think that, it is possible to convert every physical asset to cash. It is important to note that we also have non-physical assets that can generate revenue.
The difference between both is nature. One has a physical nature while the other has non-physical nature. Again, the way each provides value to the investor or organization.
