A financial asset is a non-physical, liquid asset that derives value because of a contractual claim of what it represents. Stocks, bonds, cash, bank deposits, and the right to receive money in the future are all examples of financial assets.
Here’s a bit more detail on these examples:
- Stocks: Ownership shares in a company are a type of financial asset. The value of the stock derives from the profitability of the company and the perceived value of the company in the market.
- Bonds: Bonds are loans made to entities such as corporations or governments. When you buy a bond, you are buying the right to receive the principal amount back at a certain date along with interest payments at a predetermined rate.
- Cash: Cash itself is considered a financial asset because it represents the ability to buy goods and services.
- Bank Deposits: Money deposited in a bank isn’t a physical asset but a financial one. The bank owes you that money, and you are free to withdraw it at any time. Meanwhile, the bank might use your money to fund loans to other customers.
- Accounts Receivable: This is money owed to a company by its customers. Once the customers pay their bills, the company will receive cash.
Financial assets are usually more liquid than other types of assets and can be easily bought, sold, or traded on financial markets. They are a critical component of any investment strategy, and understanding them is essential for understanding the global economy.
Example of a Financial Asset
Let’s consider an example from the perspective of an individual investor, Alice.
Alice has a diversified portfolio of financial assets:
- Cash: Alice has $10,000 in a savings account. This money is immediately available to her for use and is considered a financial asset.
- Stocks: Alice owns 100 shares of TechGrowth Inc., a technology company. The shares are currently valued at $50 each, so this part of her financial assets is worth $5,000.
- Bonds: Alice has invested $15,000 in government bonds. The government promises to pay her back with interest after a certain period. The current value of these bonds contributes to her financial assets.
- Mutual Funds: Alice has also invested $20,000 in a mutual fund, which is a managed investment program funded by shareholders that trades in diversified holdings.
- Retirement Account: Alice has a 401(k) retirement account through her employer, and the account currently has a balance of $100,000. The account consists of a mix of investments such as stocks and bonds.
The sum of all these investments and cash holdings is Alice’s total financial assets. Each type of asset carries different risks and potential returns, and together they form a diversified investment portfolio.