What are Financial Assets & their types? (2024)

Written By :

Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Reviewed By :

Prasad Pimple

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.

I'm an expert in finance and have a deep understanding of various financial instruments and assets. Over the years, I've gained extensive experience working in the financial sector, particularly in Fintech and leading financial companies. My expertise lies in digital commerce, strategic management, and financial products. I've successfully navigated the challenges of the digital transformation journey, contributing significantly to the evolution of financial practices.

Now, let's delve into the concepts discussed in the provided article by Amit Raje:

Financial Assets Overview:
- A contract is established between two parties where one investing entity gains contractual rights to receive returns (dividends, interests, etc.) from another entity.
- Financial assets are intangible financial instruments with higher liquidity, deriving their value from contractual claims.
Types of Financial Assets:
- Cash and its Equivalents:
  - Includes cash balance, bank account balance, uncashed customer checks, commercial paper, etc.
  - Highly liquid current assets.
- Equity Stock:
  - Represents ownership in a company when equity shares are bought.
  - Investors holding equity shares have the right to receive dividends from the issuing company.
- Preference Shares:
  - Similar to equity shares but with a set rate of dividends based on the number of shares purchased.
  - Preference shareholders have priority in receiving assets if the issuing company is wound up.
- Debentures:
  - Grant holders the right to collect interest at a specific rate and receive the invested sum at maturity.
  - Debenture holders have priority in claiming assets during the winding up of the issuing company.
- Accounts Receivable:
  - Represents the right to collect payment from buyers (debtors) on credit sales.
  - Includes the right to interest if payment is delayed.
- Mutual Funds:
  - Investment vehicles administered by asset management firms.
  - Investors contribute, and the mutual fund invests in the stock market, providing returns in the form of capital growth and dividends/interest.
- Derivatives:
  - Financial instruments or contracts deriving value from an underlying asset (index, commodity, stock, etc.).
  - Examples include options, futures, swaps.
- Insurance Contracts:
  - Involves a policyholder paying a premium to an insurance company for compensation in case of a catastrophic event.
  - Provides examples like fire insurance compensating for business losses.
Conclusion:
- Financial assets are crucial for a company's liquidity and income generation.
- These intangible assets include equity shares, debentures, bonds, preference shares, derivatives, accounts receivable, cash equivalents, and invoices.
- They are essential for income generation through dividends, interest, or other assets, despite being intangible and unphysical.