What are the Properties of Financial Assets?
The Properties of Financial Assets studies how the unique nature of different financial assets affects their price, use, and value. The financial markets work in many different ways and utilize a diverse group of assets for capital. Some are tangible and have a physical existence, such as stocks or gold.
Other intangible assets, such as a contract, patent, or lease, can be intangible. Many different types of financial assets are used worldwide, and understanding the major types will help you choose investments that suit your financial goals.
What Is a Financial Asset?
A financial asset refers to those assets that can be bought, sold, and held for a period with the expectation of earning profits. The returns on financial assets are generally stated as a percentage of the capital invested along with some form of interest or dividend.
Also referred to as a liquid asset, it is tradable, fungible, and claims a specific value according to its existence.
What Are the Different Types of Financial Assets?
Various types of financial assets can help you meet your financial goals. Below are different assets to choose the right ones for your needs and situation.
- Equities: Stocks are one form of ownership in a corporation. Each share is a fraction of the company and represents a claim on the company’s net assets. A corporation is owned by shareholders who buy shares and use them to vote in the manner of electing the directors and on major issues raised by shareholders.
- Bonds: They are issued by a company as a loan. Bondholders are expected to pay back the principal amount at the specified time. The interest rate payable by bondholders is based on the company’s credit rating, the bond’s maturity period, and the risk of default.
- Money market securities: These instruments are short-term debt securities that trade in narrow ranges because they are liquid and have very short maturities. The yields on these instruments are mostly government securities.
- Equity-linked Securities: An equity-linked security is a financial instrument that contains shares and a portion of the company’s assets as part of the value.
What are the Properties of Financial Assets?
A property is a characteristic that is inherent to the asset itself. The intrinsic property of an asset directly influences the price, use, and value of that particular asset. Also referred to as a characteristic of an individual asset, it is unique to that asset.
This property of financial assets is a characteristic that is inherent to the asset itself. The intrinsic property of an asset directly influences the price, use, and value of that particular asset. There are also other inherent properties of financial assets that affect value. The following are some of the intrinsic properties of financial assets:
- Income-generating Property: The property that enables an asset to generate income and is called an income-generating property.
- Desirability property. This refers to an asset’s unique quality or features that make it more attractive to investors. For example, a branded product can be much more desirable than a generic one; thus, its price will also be higher.
- Liquidity. It is measured by the ease and speed with which an asset can be converted into cash. For instance, government bonds are usually considered a highly liquid asset.
This is the behavior of the market in which an asset is found. The actions of buyers and sellers affect a financial asset’s price, use, and value. They are also categorized as some of the following:
- Marketability: It is a measure to ascertain the ease of trading an asset. The more active the market is for a particular asset, the better its marketability.
- Trading volume: The number of trades in an asset over a specific time period; the greater the trading volume, the greater the liquidity.
- Minting period: it is the time taken to complete a transaction for financial assets. This is usually affected by the liquidity and trading volume of an asset.
- Borrowing power: This is the availability and price of credit in a particular market. For instance, real estate has a lower borrowing power in comparison to stocks or bonds.
This refers to the financial returns on investment. Some of the properties of financial assets are based on their expected return. For example, expecting a stock to return 8% may be regarded as a very good investment.
Pros and Cons of Properties of Financial Assets
The properties of financial assets have certain advantages and disadvantages, which will determine how a particular asset is used in the market and what kind of return to expect. There are positive and negative attributes for each property of a financial asset.
- Liquidity: When financial assets are available in a liquid market, their prices can be easily determined.
- Capital requirement: One of the main reasons for the existence of financial assets is to provide a return on capital.
- Return: Assets with a higher return on investment will be more attractive to investors because they provide greater investment potential.
- Trading period: The longer the trading period, the higher the cost of borrowing. Thus, this property may not be very useful in a particular case.
- Yield: This is the return that is provided by an investment. But the market and its liquidity may affect the yield on assets.
There are many properties of financial assets that majorly impact the value and price of that particular asset. The properties of financial assets affect their price, use, and value to a large extent. It is essential to consider all these features before investing in an asset.