There’s been a great confusion as to what an asset is and what a liability is. Some of us even have assets we don’t see as assets but as things without value and because of this, we’ll try to shed more light on what assets are and what liabilities are.
Let’s begin with Financial Assets. What is a financial asset? A financial asset is money at hand or that which is easily accessible in form of cash deposits, checks, loans, accounts receivable and market securities. People mix up financial assets with real assets but it should be known that financial assets are more liquid than real assets. They are also intangible and derives value because of a contractual claim of what it represents.
There are various types of financial assets and some of them are:
- A certificate of deposit is a savings certificate issued by the bank to the holder which entitles the holder to deposit an amount of money at a bank for a set time with a guaranteed interest rate and receive when due. A CD is typically held for three to six months or three to five years depending on the which means there’s a time length attached to it. Interest is paid monthly, quarterly or yearly.
- Bonds are debt investments. You’re wondering how you can be a debt investor? Well, the holder of the bond loans money to companies or governments corporations to finance short-term projects. The bonds state how much money is owed, the interest rate being paid and the bond’s maturity date.
- Stocks are financial assets with no set ending date. An investor buying stocks becomes part owner of a company and shares in its profits and losses. Stocks may be held indefinitely or sold to other investors for a price set. When the holder of the stock decides to part with it, it is sold off in units called shares which makes the buyer a shareholder in the company. Shares are one of the most traded financial instruments. If you buy a unit or units of share, you are buying a piece of the company.
- Money: Last but not the least is money. Do I need to say more on this? Well, money is a financial asset because the value of the asset itself comes from the credit of the government that issued that money, the purchasing power and its liquidity. It’s the most liquid form of financial asset and commonly used for daily transactions.
Well, that’s about it on financial assets. Financial liabilities will be touched next week Wednesday. Have a lovely day ahead.