Financial assets and the markets they inhabit

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Financial assets and markets

More recently, categories such as financial assets, brokers, traders, digital currencies, etc., were of interest to a limited number of people in certain professions. Today, everything related to investments, intangible assets or financial markets can be discussed at specialized forums by former engineers, schoolchildren, housewives and even humanities students. And this is quite a natural phenomenon. Providing access to the global financial market through the Internet has contributed to the development of online trading and everything connected with it. Everyone who wants to earn extra money, got the opportunity to become a full-fledged participant in e-commerce, and to take in this exciting process the place that corresponds to its capabilities and abilities.

Types of financial assets

If you decide to become a full-fledged trader, you will have to learn the key concepts of this type of activity. And above all, deal with such categories as “financial assets”, “trading instruments”, “financial assets market”.

When searching for definitions of what “financial assets” are on the World Wide Web, it is imperative to indicate that you are interested in this term from the position of an online trading participant. This is due to the fact that in economic theory, financial assets include everything from monetary gold to direct investment and payables / receivables. And, according to international standards of financial and management accounting, the assets in question are in no way connected with the category of novice trader. In this case, the term “digital financial assets” or simply “digital assets” is more appropriate.

The lack of a unified legislation regulating the issues of online trading of intangible assets is one of the main problems of this type of activity. But this issue must be resolved by joint efforts so that the US position does not contradict the laws of China or Japan. At the moment, the work of brokers is controlled by individual regulators who follow the legal rules of the country where they are registered.

Modern Internet brokers provide access not only to traditional trading tools, but also to new digital assets, including:

в—Џ Currency pairs.

в—Џ Shares, bonds, certificates of deposit, bills of exchange.

в—Џ Futures, options and swaps.

в—Џ Precious metals.

В What factors influence their cost?

When planning to earn using online trading, you need to know exactly in which direction you will work. You can not cover everything at once. Many participants in online trading only consider themselves to be traders, being in fact ordinary investors. They find an appropriate broker who provides such a service as PAMM accounts or automated trading and invest money, receiving (of course, no one gives 100% guarantees) a certain income. At the same time, it is possible to manage risks (the rule is simple: the amount of profit is inversely proportional to the probability of losing your investment), using signals, charts, indicators, that is, working like a real trader.

Each asset has its own nuances, about which you need to know as much as possible so that your activity brings profit. For example, when dealing with shares of enterprises, one must take into account that at the end of a quarter / year, many of them overstate financial performance, and this automatically affects the value of these assets. The rate of major world currencies depends on the political situation, economic indicators or the cost of strategic raw materials. For example, the increase in the price of oil is reflected in the exchange rate of those countries that are the main global suppliers of these raw materials. Such an unpredictable digital asset, like a cryptocurrency, can rise in price greatly if some serious investor decides to invest a decent amount in it. And to predict all the factors that influence the value of a particular asset is simply unrealistic. But if you work a lot in this direction, then you can achieve positive results and learn how to make money by entering into only profitable deals based on your own forecasts.

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What a newbie trader should know about financial markets and trading on them

But not only the above analytical skills help the trader to earn in financial markets. Experienced experts recommend that anyone who plans to work, relying solely on their own intuition, immediately drop this idea. If you trust your “extrasensory” abilities, register with the bookmaker. There and the rates are higher, and you do not need to learn financial terms (every trader has to do it).

For those who are determined to receive basic / additional income by entering into financial transactions with the help of online brokers, the following recommendations will be helpful:

в—Џ Carefully choose a trading platform. Study the maximum number of objective characteristics of a broker, not strongly trusting reviews on the Internet (they can be ordered by both resource owners and competitors). First of all, pay attention to the “age” of the company and the presence of reputable regulators.

в—Џ Do not forget that almost every broker provides additional opportunities for profit. For example, an affiliate program (there are companies that pay 50-100 dollars for each trader brought to the project).

в—Џ Always carefully study the tools that will help you make the right predictions for a profitable deal. These include: advisors, indicators, trader’s calculators, charts, individual programs and much more.

в—Џ You should not trust on all 100% demo accounts, in terms of potential profits that you earn with the help of virtual money. As a rule, even among the most honest brokers this indicator is always higher than in reality.

By adhering to the listed recommendations, being careful and carefully analyzing each step, you can eventually become a qualified trader and make this type of activity your main source of income.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Financial Assets

What are Financial Assets?

The financial assets can be defined as an investment asset whose value is derived from a contractual claim of what they represent. These are liquid assets as the economic resources or ownership can be converted into something of value such as cash. These are also referred to as financial instruments or securities. They are widely used to finance real estate and ownership of tangible assets.

These are basically legal claims and these legal contracts are subject to future cash at a predefined maturity value and predetermined time frame.

Types of Financial Assets

These all can be classified in different categories according to the features of the cash flow associated with them.

#1 – Certificate of Deposit (CD)

This type of financial asset is an agreement between an investor (here, company) and a bank institution in which the customer (Company) keep a set amount of money deposited in the bank for the agreed term in exchange for a guaranteed rate of interest.

#2 – Bonds

This type of financial asset is usually a debt instrument sold by companies or government in order to raise fund for short-term projects. A bond is a legal document that states money the investor has lent the borrower and the amount when it needs to be paid back (plus interest) and the bond’s maturity date.

#3 – Stocks

Stocks do not have any maturity date. Investing in stocks of a company means participating in the ownership of the company and sharing its profits and losses. Stocks belong to shareholders until and unless they sell them.

#4 – Cash or Cash Equivalent

This type of financial assets is the cash or equivalent reserved with the organization.

#5 – Bank Deposits

#6 – Loans & Receivables

Loans and Receivables are those assets with fixed or determinable payments. For banks, loans are such assets as they sell them to other parties as their business.

#7 – Derivatives

Derivatives are financial assets whose value is derived from other underlying assets. These are basically contracts.

All the above assets are liquid assets as they can be converted into their respective values as per the contractual claims of what they represent. They do not necessarily have inherent physical worth like land, property, commodities, etc.

Financial Assets Classification

There is no single measurement classification technique that is suitable for all these assets. It can be classified as Current Assets or Non-Current Assets on a company’s balance sheet.

#1 – Current Assets

This contains those investment assets which are short term in nature and are liquid investments.

#2 – Non-Current Assets

Non-Current assets like shares of other company or debt instruments held in portfolio for more than a year.

Advantages

  • Some of these assets which are highly liquid can easily be used to pay bills or to cover financial emergencies. Cash and cash equivalents come under this category. On the other hand, one may have to wait for the stock to get money as they have to be sold in exchange first followed by settlement.
  • For investors, it gives them more security when they have more capital parked in liquid assets.
  • It serves as a major economic function of financing tangible assets. This becomes possible with the transfer of funds from those who have a surplus of it to where it is needed for such financing.
  • It distributes the risk as per preferences and risk appetite of the parties involved in the investment in tangible assets. It represents legal claims to future cash expected generally at a defined maturity and defined rate. The counterparties involved in the agreement are the company that will pay the future cash (issuer) and the investors.

Disadvantages and Limitations

  • Financial assets (liquid assets) like deposits in savings accounts and checking accounts with banks are greatly limited when it comes to its return on investment, as there are no restrictions for their withdrawal.
  • Furthermore, these assets like CDs and money market accounts may prevent withdrawal for months or years as per the agreement or they are callable.
  • This majorly come with a maturity date in the contract, attempting to cash out assets before maturity calls for penalties and lower returns.

Important Points

  • The value of this asset is determined by the demand and supply of such asset in the market.
  • These assets are valued as per the cash required to convert them which again is decided based on certain parameters. The value of people’s financial assets can change significantly, especially in the case they have invested majorly in stocks.
  • The measurement of financial assets cannot be done using a single measurement method. Suppose we are measuring stocks when investments are small in quantum, the market price can be considered to measure the value of the stock at that time. However, if a company owns a large number of shares of other companies, the market price of the share is not relevant because the investor holding majority shares may not sell them.
  • Every financial asset has different risks and returns for its purchaser. For instance, a car company usually has no idea of the sale of its cars, so, the value of stocks of the company may increase or decrease. A bond can default as issuers may fail to pay back the par value of a bond. Even cash and savings accounts have risks associated as inflation may put an impact on purchasing power.

Conclusion

These are a crucial part of any organization. It always needs to have a good record of its financial assets so that is can be put to use whenever needed like in financial emergencies. It is helpful to keep a check on the availability of such assets.

Each and every financial asset has a different but particular goal for the holder, each has a different amount of risk associated with it and thus returns are also different based on risk for the purchaser of such asset. Since each type of asset has some reward & risk associated with it, it’s always advisable to keep a mix of different asset types to have an optimal portfolio. This helps in the proper functioning of the organization without any dearth of assets.

This has been a guide to what are Financial Assets and its definition. Here we discuss the types of Financial Assets and its classification along with examples, advantages, and disadvantages. You may also learn more about the following articles –

Financial Asset

What Is a Financial Asset?

A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets. Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form. Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry.

Financial Asset

Understanding a Financial Asset

Most assets are categorized as either real, financial, or intangible. Real assets are physical assets that draw their value from substances or properties, such as precious metals, land, real estate, and commodities like soybeans, wheat, oil, and iron.

Intangible assets are the valuable property that is not physical in nature. They include patents, trademarks, and intellectual property.

Financial assets are in-between the other two assets. Financial assets may seem intangible—non-physical—with only the stated value on a piece of paper such as a dollar bill or a listing on a computer screen. What that paper or listing represents, though, is a claim of ownership of an entity, like a public company, or contractual rights to payments—say, the interest income from a bond. Financial assets derive their value from a contractual claim on an underlying asset.

This underlying asset may be either real or intangible. Commodities, for example, are the real, underlying assets that are pinned to such financial assets as commodity futures, contracts, or some exchange-traded funds (ETFs). Likewise, real estate is the real asset associated with shares of real estate investment trusts (REITs). REITs are financial assets and are publicly traded entities that own a portfolio of properties.

The Internal Revenue Service (IRS) requires businesses to report financial and real assets together as tangible assets for tax purposes. The grouping of tangible assets is separate from intangible assets.

key takeaways

  • A financial asset is a liquid asset that represents—and derives value from—a claim of ownership of an entity or contractual rights to future payments from an entity.
  • A financial asset’s worth may be based on an underlying tangible or real asset, but market supply and demand influence its value as well.
  • Stocks, bonds, cash, CDs, and bank deposits are examples of financial assets.

Common Types of Financial Assets

According to the commonly cited definition from the International Financial Reporting Standards (IFRS), financial assets include:

  • Cash
  • Equity instruments of an entity—for example a share certificate
  • A contractual right to receive a financial asset from another entity—known as a receivable
  • The contractual right to exchange financial assets or liabilities with another entity under favorable conditions
  • A contract that will settle in an entity’s own equity instruments

In addition to stocks and receivables, the above definition comprises financial derivatives, bonds, money market or other account holdings, and equity stakes. Many of these financial assets do not have a set monetary value until they are converted into cash, especially in the case of stocks where their value and price fluctuate.

Aside from cash, the more common types of financial assets that investors encounter are:

  • Stocks are financial assets with no set ending or expiration 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.
  • Bonds are one way that companies or governments finance short-term projects. The bondholder is the lender, and the bonds state how much money is owed, the interest rate being paid, and the bond’s maturity date.
  • A certificate of deposit (CD) allows an investor to deposit an amount of money at a bank for a specified period with a guaranteed interest rate. A CD pays monthly interest and can typically be held between three months to five years depending on the contract.

Pros and Cons of Highly Liquid Financial Assets

The purest form of financial assets is cash and cash equivalents—checking accounts, savings accounts, and money market accounts. Liquid accounts are easily turned into funds for paying bills and covering financial emergencies or pressing demands.

Other varieties of financial assets might not be as liquid. Liquidity is the ability to change a financial asset into cash quickly. For stocks, it is the ability of an investor to buy or sell holdings from a ready market. Liquid markets are those where there are plenty of buyers and plenty of sellers and no extended lag-time in trying to execute a trade.

In the case of equities like stocks and bonds, an investor has to sell and wait for the settlement date to receive their money—usually two business days. Other financial assets have varying lengths of settlement.

Maintaining funds in liquid financial assets can result in greater preservation of capital. Money in bank checking, savings, and CD accounts are insured against loss of up to $250,000 by the Federal Deposit Insurance Corporation (FDIC)—the National Credit Union Administration (NCUA) for credit union accounts. If for some reason the bank fails, your account has dollar-for-dollar coverage up to $250,000. However, since FDIC covers each financial institution individually, an investor with brokered CDs totaling over $250,000 in one bank faces losses if the bank becomes insolvent.

Liquid assets like checking and savings accounts have a limited return on investment (ROI) capability. ROI is the profit you receive from an asset less than the cost of owning that asset. In checking and savings accounts the ROI is minimal. They may provide modest interest income but, unlike equities, they offer little appreciation. Also, CDs and money market accounts restrict withdrawals for months or years. When interest rates fall, callable CDs are often called, and investors end up moving their money to potentially lower-income investments.

Liquid financial assets convert into cash easily.

Some financial assets have the ability to appreciate in value.

The FDIC and NCUA insure accounts up to $250,000.

Highly liquid financial assets have little appreciation

Illiquid financial assets may be hard to convert to cash.

The value of a financial asset is only as strong as the underlying entity.

Illiquid Assets Pros and Cons

The opposite of a liquid asset is an illiquid asset. Real estate and fine antiques are examples of illiquid financial assets. These items have value but cannot convert into cash quickly.

Another example of an illiquid financial asset are stocks that do not have a high volume of trading on the markets. Often these are investments like penny stocks or high-yield, speculative investments where there may not be a ready buyer when you are ready to sell.

Keeping too much money tied up in illiquid investments has drawbacks—even in ordinary situations. Doing so may result in an individual using a high-interest credit card to cover bills, increasing debt and negatively affecting retirement and other investment goals.

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