Learn more about business asset finance!

A financial asset is a liquid asset with value derived from a legal claim to ownership or a contractual right. Business asset finance includes, among other things, cash, investments in stocks, bonds, mutual funds, and bank deposits. 

Unlike real estate, commodities, or other tangible physical assets, financial assets do not always have an intrinsic physical value or even a physical form. Instead, the market conditions in which they trade and the risk level determine their worth.

Knowledge of a Financial Asset

Most assets fall into three categories: tangible, financial, or intangible. Real assets are actual possessions that derive their worth from other things, such as commodities like soybeans, wheat, oil, iron, precious metals, land, and real estate.

A valuable item that is not physical is known as an intangible asset. They consist of intellectual property and patents.

The other two assets are financial assets. With merely the stated value on a piece of paper, like a dollar bill, or a listing on a computer screen, financial assets may appear intangible—non-physical.

The ownership of an entity, such as a publicly traded business, or a claim to contractual rights to payments, such as interest income from a bond, is what that paper or listing represents. A legal claim to an underlying asset is the source of value for financial assets.

This supporting asset could be tangible or intangible. For instance, commodities are the underlying assets supporting certain exchange-traded funds and commodity futures contracts. The real asset linked to shares of real estate investment trusts is also real estate. REITs own a portfolio of properties and are publicly traded financial assets.

Typical business asset finance types

The definition of financial assets as given by the International Financial Reporting Standards is as follows:

Instruments of an entity's cash equity

A receivable is a legal claim that one party has to another party's financial asset.

The legal power to swap financial obligations or assets with another party on advantageous terms.

A deal that will be paid out in the company's equity instruments

The term mentioned above includes financial derivatives, bonds, assets in the money market or other accounts, and equity interests in addition to stocks and receivables. Since the value and price of many of these financial assets vary, especially in the case of stocks, many of them do not have a fixed monetary worth until they are converted into cash.

Investors encounter

Stocks are monetary assets that have no predetermined end or expiration date. A shareholder who purchases stock becomes a part-owner of the business and shares in its gains and losses. Stocks can be kept for as long as desired or sold to other investors.

Companies and governments can finance short-term projects in part by issuing bonds. The bonds specify the amount owed, the interest rate being paid, and the bond's maturity date. The bondholder is the lender.

An investor can deposit money at a bank for a certain time with a certificate of deposit (CD), which offers a guaranteed interest rate. A CD can normally be held for three to five years, depending on the contract, and pays interest monthly.

Highly liquid financial assets: Pros and Cons

Money market accounts, savings, and checking accounts are the purest financial assets. Bills, urgent needs, and other financial emergencies can easily be met with the money in liquid accounts.

Other types of financial assets may be less liquid. The capacity to quickly convert a financial asset into cash is known as liquidity. It refers to a stockholder's ability to buy or sell securities on a ready market.

 Liquid markets are those in which there are numerous buyers and sellers, as well as no significant execution latency.

Pros 

• It's simple to transfer liquid financial assets into cash.

• Some financial assets have the potential for value growth.

Cons

• Financial instruments with high liquidity don't appreciate much.

• It could be challenging to transform illiquid financial assets into cash.

• A financial asset's value can only be as strong as the underlying organisation.