Financial Asset

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What is a 'Financial Asset'

A financial asset is a tangible liquid asset that derives value because of a contractual claim of what it represents. Stocks, bonds, bank deposits and the like are all examples of financial assets. Unlike land, property, commodities or other tangible physical assets, financial assets do not necessarily have physical worth.

BREAKING DOWN 'Financial Asset'

A financial asset derives value from a contractual claim. Since the asset does not have value until it is converted into cash, the value can fluctuate, especially in the case of stocks.

Types of Financial Assets

A certificate of deposit (CD) allows an investor to deposit an amount of money at a bank for a set time with a guaranteed interest rate. A CD is typically held for three to six months or one, three or five years. Interest is paid monthly.

Bonds are one way companies or governments finance short-term projects. The bonds state how much money is owed, the interest rate being paid and the bond's maturity date.

Stocks are financial assets with no set ending date. An investor buying stocks becomes part owner of a company and shares in its profits and losses. Stocks may be held indefinitely or sold to other investors.

Pros and Cons of Financial Assets

Financial assets such as checking accounts, savings accounts and money market accounts are easily turned into cash for paying bills and covering financial emergencies, such as car repairs. Keeping too much money in illiquid investments may result in using a high-interest credit card to cover bills, increasing debt, and negatively affecting retirement and other investment goals. In the case of stocks, an investor has to sell stock and wait for the settlement date to receive the cash; an investor must have other financial assets available for when emergencies arise.

Keeping money in more conservative accounts results in greater preservation of capital. Money in bank accounts is typically covered by the Federal Deposit Insurance Corporation (FDIC) and is insured against loss. When enough money is set aside in more liquid accounts, an investor is better able to purchase more aggressive assets such as real estate or Forex with greater peace of mind.

However, liquid assets such as checking accounts and savings accounts have more limited return on investment. In addition, CDs and money market accounts restrict withdrawals for months or years. When interest rates fall, callable CDs are often called, and investors face moving their money to potentially lower-income investments. Since FDIC insurance covers each financial institution individually, an investor with brokered CDs totaling over $250,000 in one bank faces losses if the bank becomes insolvent. Also, cashing out assets before their maturity dates typically results in lower returns and other financial penalties.

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