Financial Assets

Financial assets are cash or transactional instruments that are readily convertible into cash. They are intangible, meaning they cannot be seen or felt and may not have a physical presence except for the existence of a document that represents the ownership interest held in the asset. Financial assets are those assets which are needed by a firm to carry on business. Cash reserves, bills receivable, notes receivable, shares and bonds are some common examples of financial assets.

Characteristics of financial assets

• No physical presence: Financial assets are intangible in nature, so they do not have a physical existence. For example, if you purchase a share issued by a company you receive a certificate of share from that company; in this case your ownership right is stated on a piece of paper.
• Liquidity (ability to convert into cash): Liquidity is the ability to convert an asset into cash. Financial assets are more liquid compared to real assets. Investors, companies and even governments often need to liquidate their financial assets to obtain sufficient capital to support their different functions.
• No production of their own: Financial assets are used to generate a return through investing activities. Therefore, financial assets do not produce goods or services of their own.
• Non-depreciable: Financial assets do not depreciate like physical goods, and their physical condition or form is usually not relevant in determining their market value.
• Maturity period: Financial assets have a certain maturity period, and after the maturity period their value is terminated.
• Convertibility: According to the need of investors, financial assets can be converted into other assets by selling them. Investors can then buy other physical assets or another financial asset.
• Divisibility: This refers to the minimum amount or size in which a financial asset can be traded. For example, a share price may be Rs 100 per share, a bond price may be Rs 1000 per bond, etc.

Difference between real assets and financial assets

Instruments of financial assets

Instruments of financial assets can be classified as follows.

1. On the basis of maturity period

Maturity refers to a finite time period at the end of which the financial instrument ceases to exist and the principal is repaid with interest. There are two types.

• Short term financial assets: Assets that are held for a year or less. Accountants use the term "current" to refer to an asset expected to be converted into cash in the next year. Examples: Treasury bills, commercial paper and banker's acceptance.
• Long term financial assets: Assets held on the company balance sheet for many years, such as fixed assets like property, plant and equipment, stocks, bonds or real estate and investments.

2. On the basis of ownership

• Ownership financial assets: A transaction in which a property's seller finances the purchase directly with the person or entity buying it, either in whole or in part.
• Creditorship financial assets: Debentures, commercial paper etc. are creditorship financial assets. The holders of these securities are the creditors of the security-issuing company.

3. On the basis of return

• Fixed return financial assets: Fixed income investments offer a fixed rate of return, with the interest getting accumulated over a predetermined period of time.
• Variable return financial assets: Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of the investee.