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Financial Assets: Definition and Its Different Types


June 14, 2021

Harsha Moole, M.D., MBBS


Introduction | What are Financial Assets?

A financial asset is a non-physical, intangible asset that gets its value from a contractual agreement on future cash flow or a claim of ownership of an equity instrument of another entity. Bank deposits, bonds, cash, stocks, and participation in companies’ share capitals are all financial assets. Financial assets happen to be more liquid assets than tangible assets such as commodities, land, properties, or real estate. 

Financial assets, unlike tangible assets, do not come in a physical form or have any physical worth, except for the existence of documents that represent the interest of ownership the asset holds. This is important because the documents that represent the financial asset do not have any natural value until it is converted to cash.

The papers and certificates that certify the claim of ownership, get their value from the value of the asset it represents. Nevertheless, the fact that this asset does not exist in a physical form, it is still written in a balance sheet, which represents the value it holds.

What are the Types of Financial Assets?

By the International Financial Reporting Standards, financial assets are of two types. They are current and non-current assets. Bank deposits, cash, and cash equivalents, loans, stocks, receivables, derivatives, etc are all common types of financial assets.

Fixed Deposit

This type of deposit is offered by banks and non-banking financial institutions. The money deposited in a fixed deposit is higher in the rate of interest than in savings accounts. It is a safe investment instrument that is easily renewed. The interest that is earned in a fixed deposit is taxable and this tax is deducted from its source.

Cash and Cash Equivalents

These are highly liquid assets that include cash, treasury bills, cheques, and other short-term investment securities. This goes a long way for companies with a healthy amount of cash and cash equivalents. They can meet up with short-term debt obligations. The cash equivalent maturity period is three months or less.

Bonds

A bond is a financial asset that comes in the form of a loan to a borrower by an investor for a particular rate of interest in a certain period. They are widely used by governments and corporate bodies to borrow money. These bonds can be traded publicly, over the counters, and in private parties.

Equity Shares

These shares are ordinary shares that offer owners the right to vote, to receive dividends, and to have the last claim in the event of liquidation. This share is important because of what it represents to an investor’s stake in a company. To Calculate shareholder’s equity, it will be the addition of the company’s share capital and its retained profits, subtracted by its total liabilities.

For shareholder’s equity to be positive, it means that the company has a sufficient amount of assets to recover its liabilities. But when it is negative, it indicates a balance sheet bankruptcy. Equity shares also have many types like bonus share, paid-up capital, right share, authorized share capital, etc.

Accounts Receivables

The proceeds that enter into the companies from their customers are known as account receivables. When payments are not made within their credit days, the account receivables generate interest. These credit days are from 30 – 90 days. Accounts receivables are shown as current assets in the balance sheet.

Mutual Funds

In a mutual fund, the financial asset has three ways of earning its income. We have the interest earned from bonds, income from dividends, and stocks. The institution uses the money it gets from the public to purchase different types of securities. This fund is also managed by a professional and they charge an annual fee for their services. The mutual funds’ investments are quite varied which helps in reducing risks.

Share-based Payments

It is an agreement between two parties that wishes to have their transactions settled in either cash, equity instruments, or other assets. This is a transaction that sees an entity receiving its goods or services as compensation for its equity instruments. Some of its examples are share option plans, employee share purchase plans, employee share ownership plans, etc.

Insurance Contracts

Under the insurance contract, one of the parties accepts significant insurance risk and agrees to compensate the other party under the contract’s terms and conditions. The person insuring this contract gives adequate protection for losses that may occur in the wake of unexpected events.

Derivatives

This is a contract whose value is based on underlying financial assets. It is used for diminishing risks or making predictions on an instrument. Some commonly used derivatives are forwards, futures, options, swaps, and warrants. Some of these derivatives are controlled by securities and exchange commissions while some are traded under the counter. Derivatives can be a helpful financial tool if used properly.

Real Estate Holdings

A real estate holding is another formidable financial asset that not only helps you make more money but also protects your assets. Real estate investing comes with some measure of risk which if not carefully managed can have a great impact on your personal net. A real estate holding separates the investor from the property such that on the event of lose, what the investor loses is only what was invested.

Cryptocurrencies

Cryptocurrencies are virtual monies that are in the form of tokens or coins. Cryptocurrencies have become very popular in recent times as financial assets that would help in wealth creation. Before jumping on and investing in cryptocurrencies, you may need to get as much knowledge as possible. This is because this financial asset is very volatile. All you have to do is buy the coin at a good price and sell it when it appreciates.

Private Equity Investment

Private equity investment offers investors the opportunity to invest in the stocks without going through the open stock market. Through private equity investments, accredited investors can become part owners in private companies. One benefit of private equity is that investors can diversify their portfolio and earn a higher income.

Angel Investing

Angel investors look out for startups and good business ideas and provide capital for executing such ideas. In exchange for providing capital, investors are entitled to either a percentage of the company shares or profit for an agreed timeframe.

Financial Assets

How can Doctors Acquire Financial Assets?

As a medical doctor, you have to make sure that your retirement funds are healthy. If you are having trouble thinking of how much to set aside for a comfortable retirement, then you’re not alone. Out of 100, about 56% of Americans also suffer this same issue. They do not know how much to invest.

Let’s look at it from this angle: To comfortably generate a $50,000 income (for today’s dollar rate) for the sole purpose of investment in your mid-60s, you will need a million-dollar retirement asset. But if at the age of 30 years, you already have $100,000 tax-advantaged assets, then you’re in line.

This is the best time in your life for you to invest in your future. So, once you’ve figured out the steps to follow in retiring comfortably and also adjusted some changes to your savings, it is now the best time for you to think of better ways your money can work for you. You can decide to invest in stocks as it gives you a share of ownership in a private company.

The stock investments provide you with a current income from dividends and a potential price appreciation. Financial experts have suggested a 5% investment in stock from your income.

This is because you can make up to 30% or lose about 15% of the investment in a given year. It is also profitable for people who invest in stocks for the long term as they are expected to make about 6% interest after it goes up. But to realize this advantage, it will take more than 10 years for it to happen.    

Conclusion

Financial decisions can be more complex due to the changes we are faced with, in our daily lives. But financial success is possible for most doctors. It only requires a guide from a written blueprint. Be sure to ask for a written investment and financial plan from your adviser. It will help monitor your progress. You can learn more about different financial assets you can maximize in building wealth here.

Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How. 

Stay in touch with us by signing up for our newsletter. The newsletter will keep you up to speed on the current real estate investments we are looking at, provide physicians with investment opportunities, and much more.  

Legal Disclaimer: This is not investment advice. I am not a legal and/or investment advisor. This is my personal blog, and all information found here, including any ideas, opinions, views, predictions, forecasts, commentaries, suggestions, or stock picks, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. These are my views, it is not a production of my employer, nor is it affiliated with any broker/dealer or registered investment advisor. While the information provided is believed to be accurate, it may include errors or inaccuracies. To the maximum extent permitted by law, PhysicianEstate disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. You should consult with an attorney or other professional to determine what may be best for your individual needs. Your use of the information on the website or materials linked from the Web is at your own risk. 

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Authored by Harsha Moole, M.D., MBBS

Hey there! I hope you enjoyed reading this blog. PhysicianEstate is my brain child and passion project. I run this platform to empower entrepreneurially motivated physicians to make financially educated investment decisions and discuss asset protection strategies. Lots of important but free content here and here! If you have any questions or if you are interested in partnering with me, let’s connect! hmoole@physicianestate.com

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