Assets Explained
Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real assets are tangible and therefore have intrinsic value. Because the definition of a financial asset, rather than that of a real asset, best describes stock, this is the category into which it falls.
An asset is something owned by an entity, such as an individual or business, that has value and can be used to meet debts and obligations. The total of an entity's assets, minus its debts, determines its net worth. Assets that are easily converted to cash are known as liquid assets. Those that cannot be converted to cash easily, such as real estate and plant equipment, are called physical assets.
Key Takeaways
- Stocks are financial assets, not real assets.
- A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.
- Real assets are physical assets that have an intrinsic worth due to their substance and properties such as precious metals, commodities, real estate, land, equipment, and natural resources.
- Some financial assets that invest in or backed by real assets can blur the lines somewhat, but are still financial assets whose value depends on the prices of real assets.
Real Assets vs. Financial Assets
Another important distinction is between real assets and financial assets. If you were to draw a Venn diagram of real assets and physical assets, there would indeed be some significant overlap, as does that of financial assets and liquid assets.
Real assets are so named "real" because they can usually be seen and touched. They are most often tangible assets with physical properties. A company truck, a building owned by an entity, a piece of farm equipment; a house, these are all examples of real assets.
Financial assets, on the other hand, such as stocks or bonds, cannot be seen or touched, but they represent value to the entity that owns them. Unlike real assets, stocks and other financial assets can also be converted to cash quickly when needed, making them highly liquid. Ideally, companies desire a mix of real and financial assets, though the ideal breakdown between the two varies greatly by industry.
Special Considerations
Some financial assets invest in real assets. Take the example of a mutual fund or exchange traded fund (ETF) that invests in commodities such as gold or silver. These pooled investments hold hard assets but are themselves financial assets. It is in these types of assets that overlap and confusion over asset categorization can occur. ETFs, for example, can invest in companies that are involved in the use, sale or mining of real assets, or more directly linked ETFs can aim to track the price movement of a specific real asset or basket of real assets.
Physically backed commodity ETFs include some of the most popular ETFs in the world based on volumes, such as State Street's SPDR Gold Shares (GLD) and iShares Silver Trust (SLV). Both invest in precious metals and seek to mirror the performance of those metal. Technically speaking, though, these ETFs are financial assets, while the actual gold or silver bullion they own is the real asset.
Another example are real estate investment trusts (REITs), which invest in real estate properties, ranging from residential to commercial developments. Again, while these hold real assets, REITs themselves are financial assets - financial assets whose value depends on the underlying real assets.
FAQs
Stocks, bonds, cash, and bank deposits are examples of financial assets.
Are stocks considered assets? ›
Stocks are financial assets, not real assets. A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.
What are examples of real assets? ›
The best way to think of real assets is that they are physical or tangible investments that have an intrinsic value to society. Examples include: infrastructure, such as schools, roads and hospitals. property that generates an income, such as student accommodation, warehousing and private rental housing.
What are the best real assets to invest in? ›
Real assets offer stability and appreciation over time, providing a hedge against stock market volatility. Popular real asset investments include brick-and-mortar real estate, raw land, precious metals and commodities. Assets such as classic cars, coins and stamps have outperformed some stock indexes.
Do stocks have real value? ›
The intrinsic value of a stock is its true value. It refers to what a stock (or any asset, for that matter) is actually worth -- even if some investors think it's worth a lot more or less than that amount.
Is a stock a real asset? ›
A financial asset is a non-physical, liquid asset that represents—and derives its value from—a claim of ownership of an entity or contractual rights to future payments. Stocks, bonds, cash, and bank deposits are examples of financial assets.
Is a 401k an asset? ›
Your 401(k), and any other retirement accounts, are financial assets. These are portfolios in which you hold securities and investment products that have either realized or potential value.
Is a house a real asset? ›
On the other hand, unlike a rental property, the value of your home can actually increase over time as the market grows. Given the financial definitions of asset and liability, a home still falls into the asset category.
Is car an asset? ›
Your car is considered a consumer product, and consumer products can depreciate. A car is a depreciating asset that loses value over time but retains some worth. Because you can convert a vehicle to cash, it can be defined as an asset.
Are bonds real assets? ›
Land and machinery are “real” assets, whereas stocks and bonds are “financial” assets. Issuer: Financial assets appear on the liabilities and equity side of the balance sheet.
Key Takeaways
- Understanding risk, including the risks involved in investing in the major asset classes, is important research for any investor.
- Generally, CDs, savings accounts, cash, U.S. Savings Bonds and U.S. Treasury bills are the safest options, but they also offer the least in terms of profits.
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.
What is the most valuable asset to own? ›
While any asset can boost your net worth, several large assets are likely to have a greater positive effect on your bottom line. These include your primary residence, vacation homes, rental properties, investments, and collectibles.
Do I really own my stocks? ›
Usually, securities are held in "street name," meaning you own the shares, but they are registered in the broker's name and held by it on your behalf. This generally makes stock ownership cheaper, more liquid, and much easier to prove. Your ownership is registered electronically.
What is the point of owning stock? ›
The potential benefits of investing in stocks include: Potential capital gains from owning a stock that grows in value over time. Potential income from dividends paid by the company. Lower tax rates on long-term capital gains.
Do you actually make money from stocks? ›
The way you make money from stocks is by the selling them at a higher price than you bought them. For instance, if you bought a share of Apple stock at $200 and sold it when it reached $300, you would have made $100 (minus any taxes you'd have to pay on the money you made).
Is a stock an asset or expense? ›
If the stock is a long-term investment, it would be classified as an other asset. If the stock is a short-term investment, it would be classified as a current asset. If the stock is part of the company's operating expenses, it would be classified as an expense.
What isn't considered an asset? ›
Labor isn't considered an asset. Because you need to pay a worker a salary or wage, labor is considered capital. Capital is the value of an investment for a business.
Is a stock considered a financial asset? ›
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.
What are the 4 types of financial assets? ›
a contractual claim to something of value; modern economies have four main types of financial assets: bank deposits, stocks, bonds, and loans. In reality, there are many more types of financial assets (like derivatives, calls, puts, and so on), but you only need to know the basics of these four types for this course.
