Home / Financial Asset

Financial Asset

Share on Facebook Share on Twitter Share on LinkedIn

Financial asset is a financial instrument that grants its buyer the right to receive future income from the seller. That is, it's a right over the real assets of the issuer and the cash they generate.

Unlike tangible assets (a car or a house for example), financial assets don't usually have physical value. The buyer of a financial asset has a right (an asset ) and the seller an obligation (a liability ). Financial assets can be issued by any economic unit (company, government, etc.).

A financial asset obtains its value from that contractual right. Thanks to these instruments, entities that have debt can be financed and, in turn, people who want to invest their savings get a return by investing in that debt. Financial assets are represented by physical securities or accounting entries (for example, an account in the bank).

Issuance and negotiation of a financial asset

Since it's a title, a financial asset goes through three stages. The first of these is its issuance. That is, the title doesn't exist and is created. The second stage is the negotiation in the financial markets. Finally, in the third stage, the title disappears.

Not all assets have to go through all three stages, but in some cases it can be. In any case, the two stages are common to all financial assets. From another perspective, we can distinguish two types of market according to the stage through which the financial asset passes:

- Primary market: It's that market in which the newly issued securities are traded for the first time.
- Secondary market: This is the market in which the securities are exchanged.

A financial asset is issued, acquired by an investor and, from that moment on, is traded in the secondary market. As we have indicated previously, it could happen that the financial asset goes through a third stage, its disappearance or extinction. For example, a 1-year treasury bill:

The treasury bill is issued and someone acquires it. From that moment on, if the investor who acquired him in his issuance wanted to sell it, he would have to do so at the price dictated by the secondary market. Finally, after that year, the State that issued that letter, returns the money to the investor who has the title in his possession. At that time, the particular title disappears.

The characteristics of financial assets

Financial assets have three fundamental characteristics; liquidity, profitability and risk. Each of them may vary according to the type of financial asset. In addition, there is a strong relationship between profitability, risk and liquidity. Depending on the magnitude of one will affect the other. For example, a less liquid financial asset will have more risk and therefore will require greater profitability.

- Profitability: The more interest the asset contributes, the greater its profitability.
- Risk: Probability that the issuer doesn't fulfill its commitments. The higher the risk, the greater the profitability.
- Liquidity: Ability to convert the asset into money without suffering losses.

Example of financial asset

One of the best known financial assets are the shares. An action is an aliquot of the capital stock of a company. That is, if a company is divided into 100 shares, to buy it we would have to buy the 100 shares. We would, therefore, own 100% of the company.

See also:
Back to top

Home | About Us | Contact | Privacy Policy | Terms of Use

Copyright 2011 - 2019 - All Rights Reserved