Some assets are physical items. Your house. A diamond ring. Your collection of Hummel dolls. These are tangible assets...they exist as physical items that can be sold for cash.
Other assets are more theoretical. They include things like stocks and bonds, or the money you have squirreled away in a bank account. These items represent financial assets. Financial assets are assets in the sense that can sell them, but they don't have the same physical reality as more tangible assets.
You can have physical proof of a financial asset (stock certificates or paperwork from the bank), but the real value comes from the contractual obligations. The stock grants you part ownership in a company. A bond entitles you to receive certain interest payments. Those contractual details provide you value.
Meanwhile, that stock certificate is just paper. It only has value because of what the paper represents.
But those Hummels...how can you look at them and miss their inherent physical value?
Related or Semi-related Video
Finance: What is asset allocation?1 Views
finance- a la shmoop. what is asset allocation? alright well we have one
basket, and we have all of our eggs and we have enemy boulders ditches and speed [girl holds basket]
bumps in our way. they're all out to get
us. and everything's fine as we walk along
the path of life until one day, yeah oops carnage. well how do you avoid whoops in
the land of finance? well there are a couple of key things to keep in mind and
in baskets. first investments in an of an asset class like oil or transportation
or commodities like cotton or technology like software, very roughly tend to all
move together like Canadian Geese in the spring. that is the price of oil
controlled by Royal Dutch Shell, correlates almost exactly with the price
of oil controlled by British Petroleum or BP. there are two different stocks but
they generally move in lockstep so if you invested in one company odds are [man sits on mossy bench]
good that its performance will have been very similar to that of all of its
competitors in the same oil producing space. oil is an asset and the notion of
intelligent asset allocation is that you want to diversify away risk in your
portfolio by diversifying the asset classes in which you put your dough. so
if you wanted to be broadly exposed to the S&P 500 with its dozen or two asset
classes, well you'd want to pepper your eggs in some semi even distribution may be across baskets in telecommunications real estate utilities retail insurance
banking and so on. such that when those potholes come along and you trip in one [eggs put in a line of baskets]
and you most certainly will and the basket ends up looking more like paper
when you stand up because you smushed it. well then you still have eggs to cook
from other baskets you put your money in. if that still doesn't work well maybe go
vegan. [girl stands in kitchen with empty basket and fruits on the counter]
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