TLDR: A financial asset is a non-physical asset whose value is based on a contractual claim, e.g. a claim to future payments, or an ownership interest in a company, is a financial asset. Unlike a physical asset such as real estate or equipment, it is an intangible item that has financial value and that can be readily converted into cash. Examples include stocks, bonds, and bank deposits.
What are Financial Assets?
A financial asset is a non-physical asset whose value is derived from a contractual claim. Unlike a physical or “real” asset such as a house or a car, a financial asset doesn’t have intrinsic physical value. Instead, it is a claim on future payments or an ownership stake. They are also called financial claims because they are either an ownership or a debt relationship.
For example, when you have a stock, you have a claim on a share of the company’s future earnings. When you purchase a bond, you have a claim on the future interest and principal payments of the bond issuer. These assets form a backbone of investing as well as the global economy.
Understanding Financial Assets
Financial assets are essentially intangible assets that derive value from a contractual claim. They can be converted into cash easily, which makes them an important part of a company’s or individual’s net worth. In accounting, they are listed along with non-financial assets (such as property or equipment) to give a complete view of an entity’s financial standing.
What are the Four Types of Financial Assets?
Financial assets can be divided into four main types:
- Equities (Stocks): Equities are stock ownership in a company. When you buy a stock, you become a shareholder and have a claim on the profits of the company and assets.
- Bonds (Debt): When you purchase a bond you are lending money to a government or a corporation. In exchange, they promise to pay you back with interest over the course of a specified period of time.
- Cash and Cash Equivalents: This includes physical cash, bank deposits, and other very liquid assets that can be easily and quickly converted to cash.
- Derivatives: These are financial contracts that derive their value from the value of an underlying asset, such as stocks, bonds, or commodities. Some examples are options and futures contracts.
These assets are so important because they are a channel through which capital flows from savers to borrowers, and that allows investment and economic growth.
Pros and Cons of Highly Liquid Financial Assets
Assets such as cash and bank deposits are considered as highly liquid, which means they can be easily and quickly converted to cash without a major loss in their value.
| Pros | Cons |
| Flexibility: Easily used for day-to-day transactions. | Low Returns: Often provide very little or no return. |
| Safety: Low risk of losing principal value. | Inflation Risk: Their purchasing power can be eroded by inflation. |
| Ease of Conversion: Can be accessed on short notice. | Missed Opportunities: May not keep pace with the growth of other assets. |
