Financial Asset. MarketCheese

A financial asset refers to the type of property that arises from contractual agreements and reveals information about the economic stability of the enterprise. Financial assets may include cash, money deposited at banks, securities (shares, stock options, bonds), mutual funds, accounts receivable, etc. They may not only be present in a physical form. Financial assets give companies the right to receive income that is derived from the use of real assets. Their price is determined by the supply and demand in the financial market, in which market participants take part in the trade of such assets.

Financial Asset explained

All financial assets can be divided into three key groups: tangible, intangible, and financial assets.

Tangible assets are also referred to as real assets or physical assets. Real assets are property held or owned by the company and used for business purposes that have physical properties (mass, shape, volume). For example, real estate, vehicles, equipment, goods, and raw materials. The company delivers goods to customers by a truck, uses warehouses to store goods, workers usually occupy areas within the office building, etc.

Intangible assets, in turn, have no physical substance. They include trademarks, licenses, patents, permits, software products. All of them have their own value and participate in the business process.

Financial assets may lack physical substance and may exist in a digital form, for example, in a bookkeeping software that records financial transactions of an organization. Despite this fact, they are able to bring profit to the enterprise that owns them. Their value comes from a contractual claim on an underlying asset.

Examples of the underlying assets include commodities. A commodity refers to an asset that determines the value of another financial instrument, such as a commodity contract.

Classification of Financial Assets

Financial assets divide into the following components:

Liquid assets of an organization, including cash deposited in bank accounts, cheques received from the customers or third parties.
An equity instrument — a contract confirming the right to a part of the assets of an organization after deducting all liabilities, such as a stock.
Accounts receivable — the balance that individuals or legal entities own to a partner company.
The contractual right to receive funds or other financial assets from another company or to exchange financial assets (liabilities) with another company on terms potentially beneficial to the business owners.
Other settlement agreements.

In addition to all the types of financial assets stated above, financial derivatives, bonds, and money market are also defined as financial assets. In most cases, they are considered probable future economic benefits and their material worth will be set only after they are sold for a profit.

The money-generating assets that may be found in an investor’s portfolio are:

A stock — a security that gives its owner (shareholder) a share of ownership in a corporation and indicates that he can receive a part of the net income from the activities of the joint-stock company in the form of dividends and part of the property if the company is wound up.
A bond — a debt security that confirms that the issuer — a firm or government— has to pay off the investor a certain amount of money and a certain interest before it reaches maturity.
A certificate of deposit — a registered security issued to a depositor, which certifies the deposit amount. Such a certificate gives the depositor the right to receive the interest specified by the contract.

Highly liquid assets

Highly liquid assets (cash, short-term financial investments) are assets that are easily converted into cash without significant losses in the market value. It is done to make payments on current financial obligations or cover life’s unexpected events.

Liquidity is a key economic indicator, which implies the ability to quickly sell an asset (goods, raw materials, loans, investments) at a market price without negatively impacting its price. A stock's liquidity refers to the demand for securities in the market, the ability to sell them quickly at stable prices. A liquid market is a market in which a high level of trading activity is observed that allows investors to buy and sell securities with minimal changes in their price. Stock market instruments — stocks and bonds — are the most liquid assets for an investor. When there is a trading session, an investor can sell assets and wait for the date when a trade is deemed final. It usually takes about two days. After that, he can receive the proceeds of a sale. For other assets, it may take longer to sell them.

If an investor keeps money in liquid financial assets, it can reduce potential losses in a portfolio. Deposit insurance is a system that allows private depositors to receive funds in case of revocation of a license or bankruptcy of a credit institution. For example, in the U.S., the maximum amount of compensation guaranteed by the state in the event of financial difficulties of the bank can reach $250,000.

Some liquid assets have limited profitability. It can be determined with the return on investment (ROI) measure. The return on investment is the ratio between the benefit an investor receives and the investment cost. The ROI shows the profitability of investments, whether the investor has received a profit. For instance, checking and savings accounts are far less profitable and earn a lower return.

Illiquid assets

By contrast, illiquid assets are hard to sell and it takes much time to turn them into revenue. The most common examples of illiquid assets are real estate, block, antiques, and collectibles. Illiquid assets may have significant value, but they cannot be quickly exchanged for money.

Illiquid securities are financial assets that are present in stock markets and for which there is no demand from investors for various reasons. They are rarely sold or bought in marketplaces. For instance, penny stocks are considered illiquid assets. Penny stocks are also referred to as "junk" stocks because of their low value. They are usually issued by small companies that are limited in monetary resources. They are associated with high-risk investing as the investor can find himself in a situation where stocks will have no buyers, if the issuer faces a crisis.

Maintaining money in illiquid assets may lead to negative consequences. For example, it can cause a situation, in which a person will pay the bills with a credit card with a high interest rate and get into credit card debt.