What Are Financial Assets? (Overview + Examples)

If you're knocking on the door of wanting to understand what financial assets are, two things are true. First, I am very excited you're here because, if you don't know me, this is some of the academic nerdy stuff I love to geek out about.

🎬 WATCH: What are financial assets?

Why? As the old saying goes, knowledge is, indeed, power. This is particularly true as an investor, where you cannot control the outcomes, but you can control how much you empower yourself with financial education, so you’re making the smartest investing decisions possible. 

🔎 Related: Financial Planning Process Guide for Investors and Families 

(In addition to co-founding Sound Financial Group, I’m also the investments professor at Mississippi College, so consider yourself warned!)

Second, if you’re more than curious about what financial assets are, you likely fall into one of the following four categories:

• You’re serious about investing (we love that!), and you’re trying to decide what asset classes fit you best.
• You’re serious about your financial plans, and you’re trying to decide what investment options fit into those plans best.
• You just like geeking out on financial stuff. Again, as a fellow nerd, I love that.
• Or heck, maybe you just stumbled down a Google rabbit hole, and now you’re wondering how the heck you got here.

If you’re in that last group, part of me wants to tell you to smash that escape button on your keyboard, but I encourage all of you to stick around.

Whether you’re seeking to further your understanding due to investment decisions that lay before you, a financial plan you’re working toward, or you’re simply wanting to enhance your own financial literacy, you’re in the right place.

🔎 Related: What’s the Difference Between Real Assets + Financial Assets?

Now, typically, when we’re unpacking what financial assets are, we’re doing so in the context of a comparison to its brethren, real assets. Today, however, we’re going to stick only to financial assets, since that’s what you’re here to learn.

How Do We Define Financial Assets?

A financial asset is a paper asset. That's all it is. It is a paper asset that represents a real asset. Financial assets enable us to “securitize” — an industry term us investor wonks love to throw around — a hard asset into a security that can be traded with greater ease. 

It’s a stock, it represents a corporation. It's cash that represents a currency. It’s a bond that represents a loan. It’s a real estate investment vehicle, like a real estate and unit investment trust, which represents a hard asset that is property somewhere. But let’s look at a few real-world financial assets examples to show you what we’re really talking about here. 

Financial Asset Examples

The U.S. dollar — a single one-dollar bill — is a claim on the U.S. government. When you hold a physical dollar you hold in your hand, what you truly possess is a claim on the full faith and credit of the United States of America. And that

dollar bill is literally a paper claim on that.

🔎 Related: What Are the 4 Types of Investments Every Investor Must Know?

Now, let’s consider something more familiar for you investors out there — a stock. A stock is a claim of ownership for one unit in a corporation. When you see stocks flying back and forth, being traded around on the market, in essence that is trading units of ownership of a public corporation. It is the paper representation of the profit, the value, the voting rights that come with that stock's class of ownership.

Another example is a bond. A bond is a loan to a government or a corporation. It is the paper representation of the interest rate, the maturity, the value of that loan. So, if you went and got a 30-year U.S. Treasury bond, you would see the interest rate, the maturity date, and you would know the value of that because of the price that you paid. 

Now, the value then trades all day on the markets, but you would own a paper representation of a loan to the United States government — hence a paper value. Of course, I’ve heard people say:

“Oh, that’s just numbers on a piece of paper.”

No, it’s a real value. It is just a certain type of asset, which possesses certain characteristics and behaviors of a financial asset.

Financial Assets Advantages + Disadvantages

One of the key advantages of financial assets is they are, by nature, much more liquid with a lower barrier to entry. This is especially true when we're talking about public financial assets; they're easy to buy and sell on the public markets. 

For example, if you had the means and the desire to do so (and an investment account), you could go out right now and build a diversified portfolio. You could go out and buy Tesla stock and sell it quite easily. Meaning, when the markets open, it’s easy for you to discover the price of Tesla stock and purchase however many shares you'd like. 

But can you go and buy all of Tesla? You can try. You could see if Elon Musk would take your call, but the barrier to entry is radically higher. Price discovery (the cost to buy Tesla as a whole) is also much more difficult. Because buying a stock (a financial asset) in a company like Tesla is exponentially easier than trying to buy the entire company (a real asset) outright. 

🔎 Related: How Does Sound Financial Make Client Investing Decisions?

This, of course, leads us to the disadvantages of financial assets. Financial assets have very volatile markets because of the very characteristics that make them advantageous — they’re liquid, there’s a low barrier to entry, and there's very open price discovery. This fluidity is what creates the volatility. It lowers the intrinsic value versus the real assets itself. 

Let’s examine our Tesla scenario once more, to show you what I mean. If you wanted to buy the entire company, it would cost you hundreds of billions of dollars — plus tens of hundreds of millions of dollars in fees, as well as countless hours of negotiation. Then, after all that, you have to go run the company.

Yes, the value of owning the top EV manufacturer in the world would be extraordinary, but the barrier to entry is extremely high. And the real asset is far more valuable than the financial asset. 

Financial Assets Should Represent a Real Asset

If you remember nothing else from this article let it be that. Deep down under the hood there is no real asset; a true financial asset represents a real asset. And if they don’t, you’ve got to question what you’re buying. Truth be told, there is a lot of “creative” stuff floating around out there.

Are there risks and volatility associated with financial assets? Absolutely. But their liquid and accessible nature make them straightforward to manage, so you can more easily build a broad and diversified portfolio. If you have questions about how financial assets should figure into your own investing or financial plan, schedule a time to talk with us. We’re happy to discuss your specific circumstances.