Financial assets - Security Analysis and Investment Management

Conducive economic environment attracts investment, which in turn influences the development of the economy. One of the essential criteria for the assessment of economic development is the quality and quantity of assets in a nation at a specific time. There are two broad types of assets: (1) real assets, (2) financial assets. Real assets comprise the physical and intangible items available to a society.

Physical assets are used to generate activity and result in positive or negative contribution to the owner of the asset. Intangible assets also result in a positive or negative contribution to the owner, but are different in that they do not have a physical shape or form. Besides real assets, the economy is supported by another group of assets called financial assets.

The major component of the financial assets is cash, also called money. Financial assets help the physical assets to generate activity. Some examples of financial assets besides cash are deposits, debt instruments, shares, and foreign currency reserves. Assets in any economy can thus be broadly grouped into physical, financial, and tangible assets, based on their distinct characteristics. Physical assets can be classified into fixed assets and working capital assets, based on the length of their life. Fixed assets, such as land, building, machinery and other infrastructure facilities, are utilized by the society over a long period of time when compared with working capital assets. Movable/circulating capital assets are produced and consumed by the society within a financial year.

In a macro sense, financial assets are regulated by the government of a country. Financial assets smoothen the trade and transaction of an economy and give the society a standard measure of valuation. Money or cash is the basic financial asset created by the government of an economy. The extent of flow of this financial asset has to be regulated in a country for the demand for and supply of funds to match the macro level, financial assets also represent the current/ future value of physical and intangible assets. The current/future value of financial assets depends on the current/future return expectations from these financial instruments. All the financial assets in an economy represent a real asset either in the present context or in the context of the future. Their dependence on real assets requires the financial assets to be valued differently. The distinctive value determination of financial instruments also requires a specific market to patronize them.

Financial assets have specific properties that distinguish them from physical and intangible assets. These properties are monetary value, divisibility, convertibility, reversibility, liquidity, and cash flow.


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