Differences Between Real Asset And Financial Asset: The term ‘asset’ is used to refer to a thing or quality that has value and is capable of generating cash flows. This is as opposed to ‘liability’ which gives rise to financial responsibilities on the side of the owner.This does not necessarily imply that assets do not require some financial obligations for its maintenance. It is rather, the subsisting nature of the value of assets that is being looked at. Characteristically, an asset does not depreciate in value except in certain extreme circumstances. It is, however, possible for financial assets to depreciate in value.This shall be highlighted contextually as this work proceeds.
At the mention of asset, what usually comes to mind is real estate.While real estate is rightly one and the most prominent of real asset, there are other things that qualify as asset. Thus, asset can be real or financial.
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Meaning of Real Asset
Real assets are assets that are utterly visible and have physical existence. They can be seen, touched but not necessarily carried about. Real assets are characterized by their tangibility and the value which is inherent in them as a result of their intrinsic properties. In other words, real assets derive their value from their physical and innate properties. A notable example of real asset is real estate.
Real estate refers to land and every other permanently fixed property attached to it. Thus, buildings and industrial constructions attached to lands are real properties as well. This is same for lands used for agricultural purposes and forestry. Natural resources like minerals, oil and gas, timber, gold, diamond, silver, platinum and other various rare natural commodities also constitute real asset. Infrastructures like walkways, bridges and public spaces are all real assets.
Art works and collections such as drawings and paintings, craft, sculptures, antiques and historical representations are also categorized as real assets. The last but not all is intellectual properties. Here, what is being referred to as real asset is not the idea but its physical representation. Intellectual properties that are real assets are basically trademarks, industrial designs and copyrights which have been represented or expressed.Thus, categorization of intellectual properties as real assets is quite limited only to the extent that the physical representation is monetized via sale for profit.
Real assets further are characterized by its illiquidity form. Thus, they are more of moneys fixed into assets,and the financial interest may take a longer time to be converted into cash.However, their value remains intact and normally appreciates alongside inflation. This guarantees security of finance.
Meaning of Financial Asset
Financial assets are those assets that do not have intrinsic value of their own (that is, value arising out of its properties); rather, their value emanates from claims under contract in respect of an asset which may be intangible or real. Financial assets are characterized by their intangibility. Thus, there need not be any physical property identified. It could be only representations made as evidence of those properties.
Again, the claims of cash flow and other benefits arising under financial assets are futuristic. The rights that arise out of financial assets can be asserted not by taking possession of the asset (because no physical asset exists in the first place) but by claims for the economic benefits accruable from them. Notable instances of financial assets are shares, stocks and bonds.
Shares and stocks owned by shareholders of companies are not identifiable but are merely represented by share certificates which certain rights emanate from. Ownership of shares is at par value, and such values are measured by and as sums of money.
The value of shares, however, does not increase alongside inflation. Same is characterized of other financial assets. Bonds and or debentures as the case may be, are also financial assets. These assets represent financial obligations owned to a creditor of a company. The certificate evidences indebtedness which has certain rights accruable from there, including the right to be repaid together with the agreed interest.
Commodities which are traded via exchange are also considered financial assets. Mutual funding for the purpose of investment on stocks and other securities also qualify as financial asset. Financial assets do arise out of contract. A contract which entitles either of the parties to a future right to sale or purchase a security or any subject matter of the contract at a futuristic date also amounts to financial asset.
A good instance is mortgage entitling the holder to a right of sale or foreclosure of the property used as security upon the expiration of the date of redemption. Cash, cryptocurrencies and other digital currencies are also financial assets. Financial assets do not have value of their own but depend on exchange for its value to accrue. The economic value of financial assets, however, is easily realized.
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Differences Between Real Asset And Financial Asset
From the information discussed above, certain distinctions are implicit:
1. Tangibility: Real assets are prominently characterized by their tangible nature. Tangible assets include buildings, land, equipment and the like that has physical form.
On the other hand, financial assets are prominently intangible in nature. Whilst the rights and interests of the bearers subsist, there is no physical claim to be made.
2. Nature of value and claims: Real assets derive their value from their physical and innate properties. This is not so for financial properties, for it is merely dependent on a futuristic claim for cash flows.
The value has nothing to do with any physical property; rather, it is concerned with rights and interests that are attributable and accruable from the claim.
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3. Liquidity: The liquidity rate of real assets tends to be less when compared to that of financial assets. Thus, real assets usually take longer to be converted into cash, whilst financial assets can be easily transacted and the money realized in liquid markets.
4. Risk of fluctuation: Real assets tend to guarantee more financial security than financial assets. This is because, whilst real assets tend to maintain its value in the liquid market, same is not guaranteed for financial assets.
Real assets may quite fluctuate in value but it guarantees appreciation for a long-term. Financial assets, however, is not characterized by appreciation in value, although it can appreciate. Most often, financial assets are faced with market volatility. The finance system can also be faced with certain risks of depreciation in case of digital currencies
5. Mode of returns: The returns of financial assets are received via dividends, repayments, interest payments, and so on, whilst the mode of returns for real assets are usually through rentals, sales and appreciation of capital.
6. Ownership: Ownership of real assets normally vests on the owner properly called. Thus, there is direct ownership, management and control of the asset.
On the other hand, financial assets inasmuch as the owner has the proprietary rights, the exercise of its the management and control is indirect. The proper owner merely has rights accruing from the asset thereof which includes the claim of cash which he is entitled to as realized from the dealings with his interest in the financial asset.
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Conclusion: Both real assets and financial assets have the ability to yield income as strictly opposed to liabilities. From the analysis above, it is clear that real assets have a stronger position than that of its counterpart, financial assets.Holistically, their striking dissimilarity lies on their form and potential value.
Edeh Samuel Chukwuemeka ACMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.