What are Financial Assets & their types?

A contract is made between two parties whereby one entity that invests its money will get some contractual right to receive returns in the form of dividends, interests, etc., from another entity where the former invests its money. Bonds, mortgages, and cash and cash equivalents are a few examples of financial assets. Financial assets are also liquid assets whose values are derived from contractual claims.

Key takeaways

Types of financial assets

• Cash, as well as its equivalents
• Equity Stock
• Preference Shares
• Debentures
• Accounts Receivable
• Mutual Funds
• Derivatives
• Insurance Contracts

Financial assets are intangible financial instruments that are more liquid in nature than the other assets of the company. These financial assets typically take the form of receipts, legal documents, certificates, etc., and receive their worth from contractual claims. They can be quickly converted into actual money. Two parties enter into a contract with financial assets that grants the party who invested the money (the investor) the right to obtain the financial benefit from the party in which the money was invested. Bonds, derivatives, fixed deposits, equity shares, and insurance contracts are a few types of financial assets.

Types of Financial Assets

Cash, as well as its equivalents

These are the company’s financial assets, which include its cash balance, the balance in its bank accounts, checks from customers that the bank, commercial paper, etc., have not yet cashed. These assets are highly liquid current assets.

Equity Stock

When a firm buys equity shares issued by another company, the equity shares become a part of the company’s financial assets. This will be the owner’s equity for the company that issued the equity shares and a financial asset for the company that bought the equity shares. The right to receive dividends from the issuing company, which are paid to the investor, is established by this financial asset.

Preference Shares

As with equity shares, holders of preference shares have the right to receive dividends, but at a set rate based on the number of shares, they have purchased from the company issuing the shares (the issuing company). If the issuing company is wound up, preference shareholders have the right to receive the assets before equity shareholders can purchase the assets.

Debentures

Debentures are financial instruments that grant holders the right to collect interest on the money they have invested at a specific rate and on specified due dates. The sum invested is also returned to the debenture holders at maturity. And debenture holders have the right to claim the assets of the issuing firm before preference shareholders, and equity shareholders do when the issuing company is wound up.

Accounts Receivable

The selling party has the right to collect payment from the party who purchases their product when sales are made on a credit basis (known as Debtor). Therefore, that debtor falls under the category of accounts receivable for the selling party.

In other words, these are assets that establish a right to the money in exchange for credit sales made by the company within the credit period granted by it and also demonstrate the right to interest if the payment is delayed, meaning that the buyer (Debtor) must repay the purchase price plus the interest amount, which is calculated at the rate determined at the time of sale.

Mutual Funds

A mutual fund is an investment vehicle administered by an asset management firm that solicits contributions from small investors in exchange for mutual fund units. As a result, after receiving funds from these investors, the mutual fund invests them in the stock market, building a diverse portfolio. Mutual funds later provide investor returns in the form of capital growth and dividends/interest.

Derivatives

Derivatives are financial instruments, or we may say that they are contracts between two parties, where the value of the contract is derived from the value of the underlying asset, which could be an index, a commodity, a stock, an interest rate, a currency, etc. Options, futures, swaps, and other derivative instruments are most frequently employed.

Insurance Contracts

Insurance contracts are a different category of financial assets where one party (known as a policyholder) pays a premium to the insurance company in exchange for the right to compensation if a business-threatening catastrophe occurs in the future. For instance, if a policyholder has a policy that entitles them to compensation in the event of a fire, the insurance company will reimburse the policyholder’s business for any losses sustained due to the fire.

Conclusion

Therefore, the company’s financial assets are the most liquid assets and meet its cash needs. These intangible financial assets are crucial for the company’s ability to generate income through dividends, interest, or any other asset, even if they cannot be physically touched. Examples include equity shares, debentures, bonds, preference shares, derivatives, accounts receivable, cash and cash equivalents, and invoices. These can also be legal documents, certificates like share certificates, invoices, etc.