What are financial assets? Definition and meaning
Financial assets are intangible assets such as bank deposits, bonds, and stocks, whose values are derived from a contractual claim of what they represent. Unlike property or commodities, they are not physical (apart from the documents’ paper).
Financial assets are more liquid than tangible assets, i.e. they can be turned into cash more rapidly.
While land or some other tangible asset has physical value, a financial document does not until it is converted into cash.
Types of financial assets
A certificate of deposit (CD) is a common type of financial asset. With a CD, the investor agrees to keep a set amount of money deposited, while the bank commits to pay a guaranteed rate of interest.
Bonds, which are sold by companies and governments, are also popular financial assets. Investors buy them to finance short-term projects.
A bond is a legal document that states how much money the investor has lent the borrower and when it needs to be paid back (plus interest).
Shares (stocks) are financial assets with no agreed ending date. When an investor buys stocks, he/she becomes part owner of a company and shares in its profits and losses. Stocks can be kept for as long as you like, and may be sold to other investors.
Financial assets are valued according to how much cash they can be converted to. The value of people’s financial assets can change significantly, especially if much of their wealth is in the form of stocks, whose prices fluctuate hourly.
With the majority of financial assets with a maturity date in the contract, cashing out too early can cost the investor financial penalties.