Definition
Financial Assets are resources owned by individuals, companies, or governments that have value and can provide future economic benefits. These assets can be easily converted into cash and typically include stocks, bonds, certificates, and bank balances. Unlike tangible assets like real property or equipment, financial assets are typically intangible and derive their value from a contractual claim.
Examples
- Stocks: Shares representing ownership in a company.
- Bonds: Debt securities issued by corporations or governments to raise capital, promising to repay the principal along with interest.
- Rights and Certificates: Instruments that provide the holder with certain rights, such as the right to purchase shares at a specified price.
- Bank Balances: Money in bank accounts that can be easily accessed or utilized.
- Mutual Funds: Pooled investment funds that invest in a variety of financial instruments, managed by professionals.
- Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-producing real estate and offer shares to investors, providing a way to invest in real estate without owning physical property.
Frequently Asked Questions (FAQs)
What differentiates financial assets from tangible assets?
Financial assets are intangible and derive their value from a contractual claim, such as stocks or bonds. Tangible assets, such as real property or machinery, are physical objects that have intrinsic value.
Can financial assets be easily liquidated?
Yes, financial assets can typically be quickly converted into cash. Stocks and bonds, for instance, are traded on markets where they can be sold relatively quickly.
What are the risks associated with financial assets?
These assets can be subject to market volatility, credit risk, inflation risk, and changes in interest rates, which can impact their value.
How do financial assets impact a company’s balance sheet?
Financial assets are recorded on a company’s balance sheet as part of its total assets. They can provide liquidity, capital for investments, and influence overall financial health.
Are financial assets taxed?
Yes, financial assets can be subject to various forms of taxation, such as capital gains tax on profits from sales, dividend taxes, and interest income taxes.
Related Terms
- Stock: A type of financial asset representing ownership in a company and a claim on part of its assets and earnings.
- Bond: A debt security in which the issuer owes the holder a debt and is obliged to pay interest and repay the principal at a later date.
- Derivative: A financial instrument whose value is derived from the value of another asset, such as futures and options.
- Liquidity: The ability to convert an asset into cash quickly and without loss of value.
- Capital Markets: Financial markets where long-term debt or equity-backed securities are bought and sold.
Online References
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, Franklin Allen
- “The Intelligent Investor” by Benjamin Graham
- “Security Analysis” by Benjamin Graham and David Dodd
- “Investments” by Zvi Bodie, Alex Kane, Alan J. Marcus
- “Options, Futures, and Other Derivatives” by John Hull
Fundamentals of Financial Assets: Finance Basics Quiz
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