Financial assets are instruments that represent ownership of value or contractual rights to receive financial benefits. Here are the main types of financial assets:
- Fixed deposits (FDs)
Fixed deposits are a popular choice for risk-averse investors. You deposit a sum of money with a financial institution for a specific period and earn a guaranteed interest rate. FDs are ideal for short-term savings goals or as a safe place to park your emergency fund.
- Stocks (Equities)
When you buy a stock, you own a tiny piece of a company. If the company performs well, its stock price could increase, offering potential for significant returns over time. Stocks also may pay dividends, a portion of the company's profits. However, stocks carry more risk than FDs, as their prices can fluctuate based on market conditions and the company's performance.
- Bonds
Bonds act like loans you make to governments or companies. They typically offer regular interest payments and repayment of your initial investment after a set maturity period. Bonds can be a good choice for investors seeking a steady income stream. While some bonds (like government bonds) are considered low-risk, their prices can be affected by changes in interest rates.
- Mutual funds
Mutual funds offer an easy way to diversify your investments. They pool money from many investors and use it to buy a basket of stocks, bonds, or other assets, managed by professional fund managers. Different mutual funds cater to various risk profiles and investment goals, and they provide diversification without needing to research individual stocks or bonds. It is important to factor in their associated fees when considering mutual funds.
- Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are companies that own and manage income-producing properties like office buildings, apartments, or shopping malls. Investors can buy shares in REITs, essentially becoming part-owners of these properties. In return, investors receive dividends generated from the rental income, offering a way to participate in the real estate market without directly buying physical properties.
Real-world examples of financial assets
Financial assets represent a claim on future cash flows or ownership in another entity. Consider Sarah, who holds shares of Apple Inc. stock. These shares are financial assets because they represent her ownership stake in the company and entitle her to potential dividends and capital gains. Similarly, John's savings account balance is a financial asset as it signifies his claim on the bank for the deposited amount plus interest. Even the government bond held by Maria is a financial asset, promising periodic interest payments and the return of principal at maturity. These examples highlight the diverse forms that financial assets can take, each with its own risk and return characteristics.
Also read: Smart investment options
Advantages of financial assets
Financial assets offer several advantages that make them attractive to investors and organisations. Here are some key benefits:
1. Liquidity
Many financial assets, like stocks, bonds, or mutual funds, can be easily bought and sold on markets. This offers flexibility if you need cash quickly.
2. Potential for growth
Certain financial assets, like stocks, have the potential to increase significantly in value over time, offering opportunities for substantial returns.
3. Income generation
Investments like bonds or dividend-paying stocks can provide a regular income stream, supplementing your earnings or supporting you in retirement.
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4. Diversification
Financial assets offer countless ways to diversify your portfolio. By investing in a mix of assets with different risk profiles, you can manage overall risk and potentially improve long-term returns.
5. Accessibility
Investing in financial assets is easier than ever before. A simple online brokerage account can open many possibilities.
6. Hedge against inflation
Investing in financial assets that offer returns outperforming the inflation rate can help preserve the purchasing power of your money.
Read also: What is Investment Policy Statement (IPS)
Conclusion
Financial assets offer a diverse range of options to help you build wealth, generate income, and achieve your financial goals. From the safety of savings accounts to the potential growth of stocks, there is an investment strategy for everyone. Understanding the different types of financial assets and their associated risks is the key to making informed decisions and building a strong financial future.
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