A:

Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real assets are tangible and therefore have intrinsic value. Because the definition of a financial asset, rather than that of a real asset, best describes stock, this is the category into which it falls.

Assets Explained

An asset is something owned by an entity, such as an individual or business, that has value and can be used to meet debts and obligations. The total of an entity's assets, minus its debts, determines its net worth. Assets that are easily converted to cash are known as liquid assets. Those that cannot be converted to cash easily, such as real estate and plant equipment, are called physical assets.

Real Assets Vs. Financial Assets

Another important distinction is between real assets and financial assets. The Venn diagram of real assets and physical assets has significant overlap, as does that of financial assets and liquid assets.

Real assets are so named because they can usually be seen and touched. They are tangible assets with physical properties. A company truck, a building owned by an entity, a piece of farm equipment; these are all examples of real assets.

Financial assets, such as stocks, cannot be seen or touched, but they represent value to the entity that owns them. Unlike real assets, stocks and other financial assets can be converted to cash quickly when needed. Ideally, companies desire a mix of real and financial assets, though the ideal breakdown between the two varies greatly by industry.

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