Since the advent of business in its basic forms, economic growth has been fuelled by capital. Human capital has been crucial for this growth, but it’s financial capital (and its generation) that has helped businesses and economies grow over time – for example, when financial resources have been provided to start-ups and businesses in various forms, allowing these entities to create value in society.
Drilling deeper into capital brings up the topic of assets, most of which can be classified as real, intangible or financial. Real assets are physical such as land, commodities or real estate, while intangible assets may not have a physical form but are still valuable (for example trademarks and patents).
Financial assets are a mix of the previous two and are intangible for the most part. However, they derive their value from the underlying asset upon which their contractual claim is based. For example, commodity futures are intangible financial assets, but these futures contracts are based on real underlying assets.
Knowing how to navigate the world of financial assets is critical for any investor. As Massimo Acquaviva – 2R Capital Investment Management Limited co-CEO and co-founder – knows, this understanding helps investors to decide where and how to direct their investments for the best returns.
The Various Types
Aside from cash, which is the most common type of financial asset, others include:
- Bonds – These are instruments used by governments, companies and institutions to finance short-term projects. The holder of the bond is typically the lender, and the bond instrument typically shows key information such as maturity date, interest date and how much money is owed.
- Certificate of Deposit (CD) – A certificate of deposit is an instrument that allows investors to deposit money for a specified duration that earns interest at a guaranteed rate.
- Stocks – Stocks are financial assets that provide investors with part-ownership of a business, thereby enabling them to share in profits and losses. Stocks have no expiration date and can be sold among investors.
- Loans – Loans typically involve an agreement between a borrower and a lender for the former to access funds from the latter for a specified period. The agreement between the two parties usually outlines the terms of the loan, including the interest rate and repayment period.
When determining the type or form of financial asset to consider investing in, liquidity is a factor. Cash (and its equivalents such as money market or savings accounts) are highly liquid and can be quickly used to cover emergencies or pay bills. Other types may not be as liquid, so it is important to consider this factor when making an investment decision.