Definition of Financial Asset in English

The concept of asset comes from actīvus, a Latin term. It can be used as a noun or as an adjective: in this case we are going to stay with its meaning as a noun. An asset, in this way, is a right or a good that has economic value and is owned by an individual or by a corporation.

Financial, on the other hand, is an adjective that refers to that related to business, the stock market, banks or public accounts. The financial is what is related to finance (the flows).

We can say, therefore, that a financial asset is a document that grants its owner the right to obtain a future profit from the one who issued the title in question. It is an intangible asset: it does not materialize in a physical sense.

According to Digopaul, each financial asset has a double face: on the one hand, it implies wealth for those who have it, but at the same time it is a liability for those who issue it. This is because the company that sells a financial asset receives money from the buyer, although later it must pay benefits.

The actions, the loans and bonds are examples of financial assets. Suppose the government of a country issues a 10 – year bond with an interest rate of the 25%. This supposes that said State will receive money from the one who buys a bond, but a decade later it will have to pay that amount plus an additional 25%. By making use of this financial asset, the State manages to finance itself on the spot, while the buyer of the bond makes an investment from which he will receive his benefit in the future.

Three main characteristics of financial assets can be recognized, and these are liquidity, profitability and risk. It is worth mentioning that the class of financial asset that we are talking about can affect the particular features of each one of them. On the other hand, there is a very close relationship between the three, since the magnitude of each of them can affect the remaining two; for example, there will be higher profitability and higher risk in an illiquid asset.

Let’s see below a brief DEFINITION OF each of these three characteristics of the financial asset:

* profitability: it is the interest that the owner receives when he accepts the risk that the temporary assignment of the amount entails. This variable increases as the interest on the financial asset also increases;

* risk: as the term itself indicates, it is the probability that the person issuing the financial asset does not meet its obligations. In other words, it is possible to say that this point depends on the solvency of the issuer, and on the guarantees that can guarantee it against the debtor. The relationship with profitability is also directly proportional;

* liquidity: this point is more complex than the previous two, but in a few words we can define it as the possibility of the asset turning into money without losses.

According to the liquidity of a financial asset, the following classification is possible:

* money in legal tender: banknote and coins. It is the most liquid type of financial asset that exists, since it is money itself;

* money in bank accounts: term, savings and demand deposits;

* Short – term debt: it is values fixed income whose emission takes place through an auction, and are called letters of the Treasury;

* Company promissory notes: financial assets issued by a private company;

* long-term public debt: obligations and Treasury bonds;

* fixed income: debt issued by private companies;

* variable income: there are many possibilities, such as financial derivatives or stocks.

Financial Asset