The Properties of Financial Assets
Financial assets can have a variety of properties. These include the ability to be converted into money and the ability to retain their value for a long period of time. They can also be convertible within the same class or to other classes, as is the case with stocks and bonds. A common example of this is the conversion of bonds to preferred stock. The conditions for conversion are usually specified in the legal document at the time the bond is purchased.
Financial assets come in various forms, including cash, stocks, bonds, mutual funds, and bank deposits. The main characteristic of these assets is that they have a value because they derive their value from contractual claims or ownership claims. Some of these assets are liquid, such as dollar bills, while others are intangible. The value of financial assets depends on market factors, including risk and supply and demand. Financial assets, however, are different from real assets, which derive their value from the underlying material, such as land, commodities, and precious metals.
Although financial assets are not tangible, they can be converted into cash quickly. Although they are not tangible, they can be traded and sold, and their values change according to market conditions. For example, if the supply of a financial asset is high, the value will decrease, while if there is a high demand for it, the value will increase.
Liquid financial assets are those that can be easily converted into cash. These assets have ready markets, with plenty of buyers and sellers. They can be sold very quickly without extended lags. In comparison, those with illiquid financial assets have varying amounts of time required for settlement. This makes them less attractive to most investors.
Despite their advantages and drawbacks, all financial assets have a risk associated with them. The risk associated with financial assets is the possibility of losing your money if you do not repay it. For example, the price of stocks may go down and bonds may default. Furthermore, banks and other financial institutions could fail.