Loading the player...

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.

  1. Cash Investment

    A cash investment is a short-term obligation, usually fewer than ...
  2. Bank Deposits

    Bank deposits are money placed into a deposit accounts at a banking ...
  3. Deposit Interest Rate

    The deposit interest rate is the interest rate paid to deposit ...
  4. Savings Account

    A savings account is a deposit account held at a bank or other ...
  5. Call Deposit Account

    A call deposit account is a bank account for investment funds ...
  6. Uninsured Certificate Of Deposit

    A certificate of deposit (CD) which is not insured against losses. ...
Related Articles
  1. Personal Finance

    The 7 Best Places to Put Your Savings

    You work hard to put your money away for the future, but where should you keep it?
  2. Investing

    Should CDs Be a Thing of the Past?

    Certificate of deposit rates remain low. Are there better alternatives?
  3. Investing

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
  4. Investing

    Getting Certificates of Deposit (CDs) in Emerging Markets: Risks and Rewards

    Learn about the risks and rewards associated with investing in a certificate of deposit (CD) offered by an emerging market and what to consider before buying.
  5. Retirement

    Money Market vs. Short-Term Bonds: A Compare and Contrast Case Study

    Discover characteristics of money market and short-term bonds, including how the investments are alike and different, and the benefits and risks each offers.
  6. Investing

    Savings Bonds Vs. CDs: Which Is Better in 2016?

    Understand what a savings bond is, what a CD is and what sets them apart from each other. Learn why a savings bond is the right investment for 2016.
  7. Personal Finance

    4 Savings Accounts for Investors

    Curious about the best saving accounts and which ones suit investors?
  8. Investing

    Money market investments or CDs: Which are better?

    Find out which short-term savings vehicle, a money market account or a certificate of deposit (CD), is a better investment for your needs.
  1. Can certificates of deposit (CDs) lose value?

    CDs are FDIC insured, so they do not lose face value, though broker-issued CD accounts do carry risks. Read Answer >>
  2. How liquid are money market accounts?

    Understand the characteristics that distinguish money market accounts from checking, savings account and money market funds ... Read Answer >>
  3. Are current assets liquid or capital?

    Take a deeper look at liquid current assets for businesses and individuals, and learn how they differ from other types of ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center