Understand the concept of financial assets in corporate finance — meaning, features, and types. Learn how financial assets like stocks, bonds, and derivatives create value in business and investment decisions. Perfect guide for BITM, BBA, and BBS students in Nepal.
Thank you for reading this post, don't forget to subscribe!Introduction to Financial Assets
In today’s dynamic financial world, financial assets form the backbone of modern investment and corporate finance. Whether you’re a business student or an investor, understanding financial assets is essential to grasp how companies raise capital, investors earn returns, and economies grow.
For students pursuing BITM, BBA, or BBS courses in Nepal, the concept of financial assets is a foundational topic in the Fundamentals of Corporate Finance. This concept explains how money and investments are represented, traded, and valued in financial markets.
This article provides a detailed explanation of financial assets, their characteristics, types, importance, and role in financial decision-making — all explained in a clear, engaging, and practical manner.
Assets are economic resources owned or controlled by a business that provide future benefits. They can be tangible (like machines or buildings) or intangible (like patents or trademarks). Assets help a firm operate, generate revenue, and increase its value.
- Real assets are physical or tangible assets that have intrinsic value. These include land, buildings, machinery, equipment, and natural resources. They are used to produce goods and services and directly contribute to economic productivity.
- The assets which do not exist physically are financial assets. They are also known as securities or financial instruments. These includes shares, common stocks, treasury bills etc.
What Are Financial Assets?
Financial assets (also known as financial instruments) are intangible assets that derive their value from a contractual claim or ownership right.
- Financial assets do not possess the productive capacity.
- They are not directly used used to produce goods and services.
- They are used by a firm to finance the physical or real assets.
Examples:
- Shares of a company
- Bonds and debentures
- Bank deposits
- Mutual funds
- Derivatives
Characteristics of Financial Assets
Financial assets possess certain distinctive features that differentiate them from physical or tangible assets.
- No Physical Existence
- More Liquid
- Do not have own Production Capacity
- Income Generation
- Transferability
- Easy Mobility
1. No Physical Existence
Financial assets do not have any physical form. They exist as paper certificates or digital records that represent ownership or a claim to future income. Their value comes from contractual rights, not from a tangible object.
2. More Liquid
Financial assets are generally more liquid than real assets. This means they can be quickly bought or sold in the financial markets without significantly affecting their price. Assets like shares, bonds, and treasury bills can easily be converted into cash.
3. Do Not Have Their Own Production Capacity
Unlike real assets such as machinery or land, financial assets cannot produce goods or services by themselves. Their value is derived from the income they generate, not from direct involvement in production.
4. Income Generation
Financial assets provide income to their owners in the form of interest, dividends, or capital gains. This earning potential is one of their most important features and a major reason why investors purchase them.
5. Transferability
Financial assets can be easily transferred from one person to another. Ownership can change hands through the buying and selling process, making them highly suitable for investment and trading activities.
6. Easy Mobility
Because financial assets are mostly paper-based or digital, they can be stored, transported, and managed easily. Investors can buy, sell, or monitor these assets from anywhere, making them much more mobile compared to physical assets.
Types of Financial Assets
Financial assets can be classified into three main categories based on their nature and return characteristics:
1. Equity Instruments
Equity instruments represent ownership interest in a company. When an investor buys shares, they become a part-owner and have a claim on the company’s profits and assets.
Examples: Common stock, preferred stock.
Features:
- Ownership rights (voting rights and dividends)
- Higher returns but higher risk
- Value fluctuates with market performance
Importance in Finance:
Equity financing helps companies raise long-term capital without incurring debt obligations.
2. Debt Instruments
Debt instruments represent a loan or borrowing arrangement where the investor (lender) provides funds to an entity (borrower) in exchange for interest income and repayment of principal at maturity.
Examples: Bonds, debentures, commercial papers, treasury bills.
Features:
- Fixed or periodic income in the form of interest
- Lower risk compared to equity
- Specified maturity date
Importance in Finance:
Debt instruments allow governments and corporations to fund large-scale projects and manage capital structure efficiently.
3. Derivative Instruments
Derivatives are financial contracts whose value depends on the price of another underlying asset such as stocks, commodities, or currencies.
Examples: Futures, options, forwards, and swaps.
Features:
- Used for hedging, speculation, and risk management
- Value changes based on underlying asset performance
- Complex and suitable for advanced investors
Importance in Finance:
Derivatives provide tools to manage financial risk and improve market efficiency.
Classification Based on Accounting Standards
According to IFRS 9 (Financial Instruments), financial assets can also be classified into:
- Financial Assets at Amortized Cost – measured based on contractual cash flows.
- Financial Assets at Fair Value through Other Comprehensive Income (FVOCI) – changes in value affect other comprehensive income.
- Financial Assets at Fair Value through Profit or Loss (FVTPL) – changes in value affect profit or loss directly.
This classification determines how companies measure and report their investments in financial statements.
Importance of Financial Assets in Corporate Finance
Financial assets play a crucial role in capital formation, investment, and financial management.
Here’s why they are vital in the corporate world:
- Efficient Capital Allocation: They help in channeling savings into productive investments.
- Liquidity and Flexibility: Provide easy conversion to cash and portfolio diversification.
- Wealth Creation: Generate returns through dividends, interest, and appreciation.
- Risk Management: Derivative instruments help hedge against market volatility.
- Economic Growth: Promote investment and enhance financial market development.
- Corporate Decision-Making: Financial managers rely on asset valuation to make financing and investment decisions.
Financial Assets vs. Real Assets
| Basis | Financial Assets | Real Assets |
|---|---|---|
| Nature | Intangible | Tangible |
| Value Source | Based on contractual rights | Based on physical utility |
| Examples | Stocks, bonds, deposits | Land, buildings, machinery |
| Liquidity | Highly liquid | Less liquid |
| Ownership | Represents claim on another entity | Represents direct ownership |
| Income Type | Interest, dividends, or capital gains | Rental income or operational profit |
Real-Life Examples
- Apple Inc. issuing bonds → Investors hold debt instruments (financial assets).
- A Nepali investor purchasing shares of Nabil Bank → Equity instrument with ownership rights.
- A multinational company using currency swaps → Derivative instruments to manage foreign exchange risk.
These examples demonstrate how financial assets drive global trade, corporate financing, and investment strategies.
Conclusion
In summary, financial assets are the building blocks of the modern financial system. They represent ownership, debt, or contractual claims that enable businesses and investors to manage capital, generate returns, and mitigate risks.
For BITM, BBA, and BBS students in Nepal, mastering the concept of financial assets is essential for understanding how financial markets operate and how corporate finance decisions are made.
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Explore related topics like Types of Financial Markets, Time Value of Money, and Capital Budgeting Techniques to deepen your understanding of corporate finance and strengthen your academic performance.
Frequently Asked Questions (FAQ)
Q1: What is the main difference between financial and real assets?
A: Financial assets are intangible and represent ownership or debt claims, whereas real assets are tangible and have physical existence, like land or buildings.
Q2: Are bank deposits considered financial assets?
A: Yes. Bank deposits are financial assets because they represent a claim on the bank to return the deposited funds with interest.
Q3: Which financial asset carries the highest risk?
A: Equity instruments, like common shares, carry higher risk due to market volatility but offer higher potential returns.
Q4: How do financial assets contribute to economic growth?
A: They facilitate capital mobilization, investment diversification, and efficient resource allocation in the economy.
Q5: What are the three main types of financial assets?
A: Equity instruments, debt instruments, and derivative instruments.