Financial assets are liquid assets that derive value from a legal claim or ownership of an underlying asset, such as shares or bank deposits.
In general, items that have value are considered assets. All assets that derive value from an arrangement or service are called financial assets. Financial assets can take physical form, but are usually not physical.
Financial assets are divided into two categories: traded and non-traded.
Financial assets that are traded can be bought or sold on the open market at a given price. Examples of such assets include stocks, bonds, mutual funds, certificates of deposit (CDs) and exchange-traded funds (ETFs).
These assets are often traded on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ.
Financial assets that are not traded cannot be bought or sold directly to investors or on the open market. Examples include bank accounts, life insurance policies, annuities, and retirement plans such as IRAs or 401(k)s.
These assets are usually purchased from a financial institution or insurance company and are in the name of the investor. They may appreciate in value over time, but they have no direct market value.
In conclusion, financial assets can be divided into two main categories: market and non-market. Market assets can be bought or sold on the NYSE, AMEX (American Stock Exchange) or NASDAQ. Non-marketable assets are not traded on the open market and must be purchased from a financial institution or insurance company.
How do financial assets work?
Financial assets can be divided into two categories: debt-based and equity-based. Debt-based financial assets are receivables from future earnings of the borrower, such as bonds and loans. Equity-based financial assets are ownership interests in a company or organization, such as stocks and mutual funds.
Debt financial assets
Debt financial assets are receivables from the future earnings of the borrower. These assets are a loan or bond secured by an underlying asset, such as real estate or other property.
Examples of debt financial assets include:
Bond – A bond is a fixed-income instrument that is a loan made by an investor to a borrower, usually with a promise to pay periodic interest payments and return the principal at maturity.
Loans – A loan is a type of debt instrument that allows an individual or company to borrow money from a lender, usually with a promise of repayment plus interest. Loan types include mortgage, auto, student and payday loans.
Commercial Paper – Commercial paper is an unsecured debt instrument issued by a company to raise funds for specific purposes, such as working capital or investments. It usually has a shorter maturity period than bonds and is often used to finance short-term needs.
Asset-backed securities – Asset-backed securities are debt instruments backed by a set of underlying assets, such as mortgages. They can be used to finance large projects or to provide liquidity to a company without having to issue new capital.
Types of financial assets
Below is a useful guide for investors who want to better understand the most common types of financial assets.
The currency and its equivalents
All savings deposits, CDs, money market deposit accounts and money market funds are considered to be cash and cash equivalents. The federal government views these assets as safe and secure investments. An example of the type of savings account offered by most banks usually carries interest at a low fixed rate.
Accounts receivable are typically short-term business assets where a customer signs a contract promising to pay for the product or service in less than a year. The value of receivables is determined by the amount due and the probability that it will be repaid, as opposed to other financial assets. Many businesses, as well as colleges like Cornell University, use this type of asset on their balance sheets.
Although equities have the highest growth potential, they are often considered the riskiest financial assets. When you purchase stock in a company, you effectively become a shareholder in that organization, since stock represents ownership in publicly traded companies.
A fixed income investment, known as a bond, is one where the issuer of a bond borrows money from the investor. Since the borrowing party promises to repay the bond on a certain date, they work similarly to loans. They enable businesses to finance transitory projects and typically bring low returns.