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What is a Financial Asset?

Updated on August 4, 2022 , 501 views

A financial asset refers to a Liquid asset derived from some contractual ownership claims or rights. The financial assets are all examples of cash, Bonds, stocks, Bank deposits as well as Mutual Funds. Unlike lands, goods, properties, and other tangible assets, the Underlying physical value of financial assets may not be fixed and always present.

Financial Asset

Its value reflects both the supply and demand dynamics in the marketplace in which it trades and the degree of risk it brings.

Financial Asset Comprehension

The majority of assets are either financial, real, or immaterial. It includes precious soil, metals, real estate, and commodities such as wheat, soya, iron, and oil. For instance, real estate refers to a physical asset.

Intangible property is a precious, non-physical property. Patents, trademarks, and intellectual property are all included in this category.

Financial assets may look intangible with the value only indicated on a paper piece, such as a rupee note or a computer display. However, one of the key characteristics of financial assets is that it represents the ownership claim of an entity, such as a public business, or the rights of contractual payments – the interest revenue of a bond.

This Underlying Asset may or may not be real. For example, commodities are the real, underlying assets that are linked to financial assets such as goods futures, contracts, or any Foreign Exchange Fund (ETFs). Similarly, real estate is the Real Asset of Real Estate Trusts Shares (REITs). REITs are financial assets and publicly listed organizations owning a property portfolio.

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Common Financial Assets Types

According to the conventional definition of International Financial Reporting Standards (IFRS), the list of the financial assets includes:

  • Cash
  • Any entity’s equity instruments
  • Contractual rights for receiving any financial asset from any other entity
  • Contractual rights for exchanging the financial assets and liabilities with others in any unfavourable scenarios
  • A contract that will be settling in the equity instruments of an entity

The aforementioned term also includes financial products, bonds, money markets, and other holdings and equity interests, in addition to stocks and Receivables. Many of these financial assets have a fixed monetary value only when it is turned into cash, particularly when equities fluctuate in value and price.

In addition to cash, the most prevalent types of financial assets found by investors are:

  • Stocks: These are financial assets without a fixed termination or expiry date. An investor who purchases stocks is a partner of an enterprise and shares its Earnings and losses. They can be held or sold to other investors indefinitely.

  • Bonds: They are one way to finance short-term projects for companies or governments. The owner is the creditor, and the bonds specify the amount of money owed, the rate paid, and the maturity date of the bond.

  • Certificate of Deposit (CD): It enables an investor to deposit a money amount with a guaranteed interest rate in a bank for a certain period. A CD pays monthly interest, normally between three months and five years, according to the contract.

Summary

In simple words, financial assets are the company's most liquid assets that meet the company's cash needs. These are not physically affected but are crucial for the company to generate revenues in terms of dividends, interest, or any other assets. They can be in the form of a legal document, as well as certificates of equity, bonds, derivatives, accounts receivables, cash, etc. They may also include equity and other shares too.

Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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