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Beginner
Financial Assets refer to stocks, bonds, notes, cash, mutual fund shares and pension holdings, among others. They represent an entitlement or partial ownership of an entity and the products, services and income produced by its Real Assets.
Synonym: financial investments
For context, today, financials assets are often represented as entries in an accounting system, however, in the past they used to be held in the form of certificates.
Currency is an example of a financial asset too. For example, the US Dollar bill says "This note is legal tender for all debts public and private", so it is a note that specifies an entitlement. Unlike real assets, financial assets do not produce goods or services. They typically have an easily-determined value on a marketplace and can be used to allocate ownership, wealth and to keep score.
Financial assets are often introduced and discussed in conjunction with Real Assets. The following points illustrate the difference between the two.
In the examples below we review a personal balance sheet for two individuals, Ms. Early and Mr. Late. Their stage in life (early and late) and risk tolerance often determines the components, value and weight (allocation) of their personal assets and liabilities.
| Ms. Early | Mr. Late | |||
|---|---|---|---|---|
| Item | Value | % | Value | % |
| Real Assets | ||||
| Art, Furnishings and Clothing | 10,000 | 10% | 1,000,000 | 10% |
| Car(s) | 10,000 | 10% | 100,000 | 1% |
| Career | 60,000 | 60% | 3,000,000 | 30% |
| House | 0 | 0% | 1,000,000 | 10% |
| Financial Assets | ||||
| Bank Accounts | 10,000 | 10% | 900,000 | 9% |
| Mutual Funds | 5,000 | 5% | 2,000,000 | 20% |
| Stocks | 5,000 | 5% | 2,000,000 | 20% |
| Total Assets | 100,000 | 100% | 10,000,000 | 100% |
Note how Financial Assets tend to be shorter-term and more liquid in nature. Also note how over time the ratio of Real Assets to Financial Assets often changes, as does the liquidity of those assets.
It is also important to consider the Liability side of the Personal Balance Sheet. Often loans are made towards Real Assets rather than Financial Assets. An example of a liability associated with a Financial Asset is the margin balance on a brokerage account.
| Ms. Early | Mr. Late | |||
|---|---|---|---|---|
| Item | Value | % | Value | % |
| Liabilities | ||||
| Credit Card | 10,000 | 20% | 0 | 0% |
| Student Loans | 40,000 | 80% | 0 | 0% |
| Mortgage | 0 | 0% | 500,000 | 100% |
| Total Liabilities | 50,000 | 100% | 500,000 | 100% |
Again, note that liabilities that appear higher in the table represent shorter-term obligations. This is important to consider not only for personal balance sheets but for corporate balance sheets as well.
Tom: I still don't understand why my Bitcoin
is considered a Financial Asset.
Leo: Dude, you bought it on leverage, so now
it's a financial liability.
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True
True, and customer deposits represent liabilities.
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