What are financial assets?

You can find what financial assets are and how they can benefit South African investors. Explore in-depth insights, analysis, and…

Por: WiredCabin Team em February 23, 2024

Understanding financial assets

Financial assets possess a wide assortment of tools that represent ownership or claims to underlying assets. These assets hold monetary value and can be traded in financial markets. Examples include:

Equities: Owning stocks in companies, which reproduce dividend payments and increase the value.
Bonds: Governmental or corporate securities with coupons, sorted as fixed or floating interest rates.
Cash Equivalents: Mainly highly liquid processes made up of money market funds, treasury bills, and different types of certificates of deposits.
Real Estate Investment Trusts (REITs): Holding shares in real estate portfolios where they take dividends and capital gains.
Commodities: Commodities that change hands to be exchanged such as raw materials or agricultural products which include, to name a few, gold, oil, and wheat.

Pros of investing in financial assets

Investing in financial assets offers numerous advantages for South African investors:

Diversification:

By allocating their resources to a diversified spectrum of financial assets, investors are protected from the favor and disfavor of individual investments, being thus the volatility absorbed.

Potential for growth:

Equities and other growth-driven assets could be vehicle for capital appreciation that is more advantageous for wealth building over the long-term period.

Income generation:

Bonds and dividend- yielding stocks may be the perfect options for those who are looking for regular income as the yields can be in the form of interest payments or dividends.

Liquidity:

Investments in financial instruments are commonly very liquid that by its definition means that they can be traded easily, like goods on the active market which provide many possibilities to the investment arsenal.

Risks associated with financial assets

Financial assets risk can be considered as one of the major risks that any organization should be aware of. While financial assets offer opportunities for growth and income, they also come with inherent risks:

Market risk:

Shifts in market situations might affect the value of financial assets, resulting in you losing money. Are these kinds of drawbacks worth the benefits to you? In any kind of investing, investment risk is different and experienced during periods of the economy crises, geopolitical effects, and changes of investors’ mind.

Interest rate risk:

Shifts in the course of rates can bring changes in the values of bonds and other fixed securities, which can be reflected in the market prices of these securities. As interest rates rise, normally less is bond price, thus holders of bond have capital loss.

Credit risk:

The securities, which constituted the bond, might lose their value in case of default by the borrower due to its inability to meet its financial duties. A buyer of a bond exposes its capital to the scenario of losing the whole repo when the issuer defaults on the payments of either interest or principal.

Liquidity risk:

Some financial assets could experience a liquidity problem, and it can consequently be hard to buy or sell them at the targeted prices. It’s a bit difficult to estimate the time frame needed to liquidate the non-liquid assets, such as the holdings of the certain stocks or private equity investments.

Types of financial assets

1. Equities

Equities (stocks) are owner-interests in those companies which are made public and cost money. Shareholders acquire stocks to the hope that at the end of the day they will reap dividends and capital gains. The equity investment gives a chance for generating huge profits, but stock market volatility is a risk factor that all participants in this process need to keep in mind.

2. Bonds

Bonds represent debt securities issued by governments, various municipalities, or, even money-generating, corporations in order to raise money. Borrowers loan money to the issuer with the borrower paying periodic interest and repaying principal at maturity.

Common types of bonds include:

Government Bonds: Debt securities issued by national governments, considered among the safest investments due to low default risk.
Corporate Bonds: Bonds issued by corporations to finance business operations or expansion projects, offering higher yields but also higher credit risk compared to government bonds.
Municipal Bonds: Bonds issued by state or local governments to fund public infrastructure projects, providing tax-exempt income to investors.
High-Yield Bonds: Bonds with lower credit ratings, also known as junk bonds, offering higher yields to compensate investors for the increased risk of default.

3. Cash Equivalents

These are money-equivalent or short-term and liquid instruments. These assets serve as alternatives to holding cash and include:

Money Market Funds: It does mutual fund investments which can be made in short-term securities of low risk.
Certificates of Deposit (CDs): Banks deposits which are marred with fixed interest rates and maturities dates, also act as a vehicle of guaranteed returns to investors.
Treasury Bills (T-bills): Short-term debt instruments and treasury bills, which are safe due to the absolute guarantee of the federal government’s credibility.

4. Real Examination Organizations (REITs)

The REITs can be defined as companies that own or finance, or operate revenues-generating real property intensities. With the introduction of such investment vehicles, investors not only can get exposure to the real estate market but also gain a real estate property without own them in. REITs can be classified into several categories, including:

Equity REITs: Acquire and govern the income-productive properties such as offices, shopping malls, and residential areas.
Mortgage REITs: Invest in mortgage-backed securities or originate mortgage loans for the purpose of meeting the needs of bank customers for lines of credit when buying properties.
Hybrid REITs: Make a relation between the features of equity and mortgage REIT by choosing mature properties and moveable assets.

5. Commodities

Commodities are also referred to as input or among either agricultural products or raw materials traded on commodity exchanges. Investors can gain exposure to commodities through various investment vehicles, including:

Physical Commodities: The craze for such things as gold, silver, oil and agricultural products through property buying and the ownership of the physical assets.
Commodity Futures: Contracts to purchase or sell commodities at a previously determined price for a commodity at a future date, which facilitates speculation on prices without direct ownership of the underlying assets.
Commodity ETFs: This could include exchange traded funds that track commodity price movements or component indexes, catering for diversification and liquidity as a commodity investor.

Last words

The financial assets are one of the most important elements for South Africans that are investing to be wealthy and maintain wealth building. Investors can handle risks and rewards very well through asset diversification and effective analysis of risks and returns. This way, you can use the assets to achieve your financial goals.

Therefore, it’s essential to note that all investments carry some level of risk, and individuals should carefully assess their risk tolerance and investment goals before making decisions. Additionally, the financial landscape can evolve, so it’s advisable to consult with financial professionals or stay updated with the latest market trends for the most accurate and current information.

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