A financial asset is a liquid asset that gains its value from a contractual right or ownership claim. Examples of financial assets include cash, stocks, bonds, mutual funds, and bank deposits. Unlike tangible physical assets such as land, property, or commodities, financial assets don’t necessarily have inherent physical worth or form. Their value reflects factors of supply and demand in the marketplace where they trade and the degree of risk they carry.
Key Takeaways
- A financial asset is a liquid asset that represents—and derives value from—a claim of ownership of an entity or contractual rights to future payments.
- A financial asset’s worth may be based on an underlying tangible or real asset, but market supply and demand also influence its value.
- Examples of financial assets include stocks, bonds, cash, CDs, and bank deposits.
Understanding a Financial Asset
Most assets are categorized as real, financial, or intangible. Real assets are physical and draw their value from their properties, such as precious metals, land, real estate, and commodities like soybeans, wheat, oil, and iron.
Intangible assets, on the other hand, are valuable properties that aren’t physical. They include patents, trademarks, and intellectual property.
Financial assets sit between real and intangible assets. Although they might seem intangible, as they often come in the form of a piece of paper with a stated value, they actually represent a claim of ownership of an entity, like a public company, or contractual rights, such as bond interest payments. Financial assets derive their value from a contractual claim on an underlying asset, which could be either real or intangible. For instance, commodity futures and some ETFs are pinned to real assets like commodities, while REITs are tied to real estate properties.
Common Types of Financial Assets
According to the International Financial Reporting Standards (IFRS), financial assets include:
- Cash
- Equity instruments of an entity, like a share certificate
- Receivables
- Contracts allowing favorable conditions for exchanging financial assets or liabilities
- Contracts settled in an entity’s own equity instruments
Other common types of financial assets investors may encounter include:
- Stocks: Often without a set expiration date, stocks make investors part-owners of companies, sharing profits and losses.
- Bonds: Used by companies or governments to finance projects, bonds specify the amount owed, the interest rate, and the maturity date.
- Certificates of deposit (CDs): These allow money deposits at a bank for a specified period with a guaranteed interest rate, usually held between three months to five years.
Pros and Cons of Highly Liquid Financial Assets
The purest forms of financial assets are cash and cash equivalents—like checking, savings, and money market accounts. These liquid accounts are easily converted into cash to pay bills or cover financial emergencies.
Pros
- Easy conversion to cash.
- Some financial assets have the potential to appreciate.
- Insured by Federal Deposit Insurance Corporation (FDIC) up to $250,000.
Cons
- Limited appreciation potential for highly liquid assets.
- Illiquid financial assets might be challenging to convert to cash straight away.
- Value depends on the strength of the underlying entity.
Illiquid Assets: Pros and Cons
Illiquid assets, like real estate and fine antiques, have value but can’t be quickly turned into cash. Stocks with low trading volumes, like penny stocks or speculative investments, also fall into this category.
Pros
- Potential for significant appreciation.
Cons
- Difficult to convert to cash, leading to the possibility of using high-interest credit cards for emergencies and increasing debt.
Real-World Examples of Financial Assets
Businesses and individuals alike hold financial assets. For an investment or asset management company, these include client portfolios, often called assets under management (AUM). For instance, BlackRock Inc. is the largest investment manager in the world, with over $6 trillion in AUM.
For banks, financial assets include the value of outstanding customer loans. For example, Capital One reported over $370 billion in total assets on its first-quarter financial statement for 2019, most of which were from real estate-secured, commercial, and industrial loans.
Related Terms: Liquid Asset, Intangible Asset, Tangible Asset, Illiquid Asset, Certified Deposit, Financial Derivatives, Equity.
References
- Internal Revenue Service. “Publication 551 (12/2018), Basis of Assets”.
- Internal Revenue Service. “Part 1. Organization, Finance, and Management. Chapter 35. Financial Accounting. Section 6. Property and Equipment Accounting”.
- IAS Plus. “IAS 32 — Financial Instruments: Presentation”.
- Federal Deposit Insurance Corporation. “Deposit Insurance FAQs”.
- BlackRock. “History”.
- BlackRock. “Introduction to BlackRock”.
- CapitalOne Financial Corporation. “Q1 2019 Quarterly Results”, Pages 2,
