In the realm of financial ecosystem, financial assets are fundamentally defined as a possession that holds value in exchange.
Assets can be broadly categorized into two main types: tangible and intangible.
A. Tangible assets are those whose value is intrinsically linked to their physical properties, encompassing items like buildings, land, and machinery.
B. Intangible assets, conversely, lack physical form.
What Are Financial Assets?
Among intangible assets, financial assets—also known as financial instruments or securities—stand out as a crucial component of modern economies. These assets are regularly traded on stock markets, and their inherent value is derived from a claim to future cash payments made by the issuer.
The individual or entity holding financial assets is known as an investor.
The Seven Key Types of Financial Assets
Financial assets offer diverse avenues for investment and claiming future cash flows. Here are seven common types:
- Share of Domestic Common Stock: These are issued by American public limited companies, such as well-known entities like Nike or Apple. Owning a share of domestic common stock entitles the investor to receive dividends distributed by the company from its Net Profit After Interest and Tax. Furthermore, in the event of the company’s liquidation due to bankruptcy, the investor holds a pro rata claim to the net asset value of the company.
- Share of International Common Stock: Similar to domestic common stock, but issued by non-American public companies. Examples include Japanese automotive giants like Toyota or Honda.
- Bond from US Treasury: Issued by the US Department of the Treasury, these bonds represent a loan to the US government. The agreement stipulates that the investor will receive interest payments every six months until the bond reaches its maturity date, at which point the original borrowed amount is repaid.
- Bond from the Foreign Government: These bonds are issued by central government entities in countries outside the US, such as a bond issued by the French government.
- Bond from the City: In this case, the issuer is a municipal government, for instance, a bond issued by the City of New York.
- Bond from the Company: Unlike government bonds, these are issued by corporations, not government entities. An example would be a bond issued by Intel.
- Bank Loan: This represents a financial asset from the perspective of the bank. It is issued by a bank to an individual borrower to facilitate the purchase of an item like a house or a car. The terms of the loan establish that the borrower will make specific payments to the bank over time, encompassing both the repayment of the borrowed amount and interest.
Financial assets are fundamental to the global economy, providing a mechanism for individuals, corporations, and governments to raise capital and for investors to grow wealth.
By understanding the different types of financial assets, from equity shares that offer a stake in a company’s future to bonds that represent a loan with scheduled repayments, investors can make informed decisions to build diversified portfolios. These intangible claims to future cash flows are not just entries on a ledger; they are the bedrock of investment and a vital component of financial planning and economic growth.
