Assets Explained
Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real assets are tangible and therefore have intrinsic value. Because the definition of a financial asset, rather than that of a real asset, best describes stock, this is the category into which it falls.
An asset is something owned by an entity, such as an individual or business, that has value and can be used to meet debts and obligations. The total of an entity's assets, minus its debts, determines its net worth. Assets that are easily converted to cash are known as liquid assets. Those that cannot be converted to cash easily, such as real estate and plant equipment, are called physical assets.
Key Takeaways
- Stocks are financial assets, not real assets.
- A financial asset is a liquid asset that gets its value from a contractual right or ownership claim.
- Real assets are physical assets that have an intrinsic worth due to their substance and properties such as precious metals, commodities, real estate, land, equipment, and natural resources.
- Some financial assets that invest in or backed by real assets can blur the lines somewhat, but are still financial assets whose value depends on the prices of real assets.
Real Assets vs. Financial Assets
Another important distinction is between real assets and financial assets. If you were to draw a Venn diagram of real assets and physical assets, there would indeed be some significant overlap, as does that of financial assets and liquid assets.
Real assets are so named "real" because they can usually be seen and touched. They are most often tangible assets with physical properties. A company truck, a building owned by an entity, a piece of farm equipment; a house, these are all examples of real assets.
Financial assets, on the other hand, such as stocks or bonds, cannot be seen or touched, but they represent value to the entity that owns them. Unlike real assets, stocks and other financial assets can also be converted to cash quickly when needed, making them highly liquid. Ideally, companies desire a mix of real and financial assets, though the ideal breakdown between the two varies greatly by industry.
Special Considerations
Some financial assets invest in real assets. Take the example of a mutual fund or exchange traded fund (ETF) that invests in commodities such as gold or silver. These pooled investments hold hard assets but are themselves financial assets. It is in these types of assets that overlap and confusion over asset categorization can occur. ETFs, for example, can invest in companies that are involved in the use, sale or mining of real assets, or more directly linked ETFs can aim to track the price movement of a specific real asset or basket of real assets.
Physically backed commodity ETFs include some of the most popular ETFs in the world based on volumes, such as State Street's SPDR Gold Shares (GLD) and iShares Silver Trust (SLV). Both invest in precious metals and seek to mirror the performance of those metal. Technically speaking, though, these ETFs are financial assets, while the actual gold or silver bullion they own is the real asset.
Another example are real estate investment trusts (REITs), which invest in real estate properties, ranging from residential to commercial developments. Again, while these hold real assets, REITs themselves are financial assets - financial assets whose value depends on the underlying real assets.
FAQs
Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real assets are tangible and therefore have intrinsic value.
Are stocks considered an asset? ›
Equity assets: Your ownership interests in a company, like stocks, mutual funds and retirement accounts.
What are examples of real assets? ›
Real assets include precious metals, commodities, real estate, land, equipment, and natural resources. They are appropriate for inclusion in most diversified portfolios because of their relatively low correlation with financial assets, such as stocks and bonds.
Are stocks and bonds assets? ›
Equities (e.g., stocks), fixed income (e.g., bonds), cash and cash equivalents, real estate, commodities, and currencies are common examples of asset classes. There is usually very little correlation and sometimes a negative correlation among different asset classes.
Is stock a real account? ›
These real accounts represent objects or assets that can be touched or are tangible—for example, land accounts, cash accounts, fixed deposit accounts, stock accounts, etc.
Is a stock a real asset? ›
Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash.
Why is stock not an asset? ›
Stock IS an investment in future earnings. Assets on the balance sheet, such as Inventory, Prepaids, Property, Plant & Equipment, and Intangibles have value only in that they will be used to generate those earnings. Any effort to monetize those “assets” in the short-term will result in significant losses.
What are non real assets? ›
Non-Real Property Assets means all Purchased Assets other than the Owned Real Property and the Leased Real Property.
Is a car a real asset? ›
Because you can convert a vehicle to cash, it can be defined as an asset. Unlike real estate, savings accounts, and other assets that have the potential to increase in value, automobiles are vulnerable to a range of depreciating factors that can cause values to plummet, such as: Odometer miles. Wear and tear.
Is private equity a real asset? ›
Private equity real estate is an alternative asset class composed of professionally managed pooled private and public investments in the real estate markets.
Stock in the context of inventory stock is regarded as a current asset, since we can expect our inventory to be cleared within the accounting period.
What is one disadvantage of buying stocks? ›
Disadvantages of investing in stocks Stocks have some distinct disadvantages of which individual investors should be aware: Stock prices are risky and volatile. Prices can be erratic, rising and declining quickly, often in relation to companies' policies, which individual investors do not influence.
What is the largest asset class in the world? ›
Real estate is the world's biggest asset class, with a projected value of $613.60 trillion in 2023.
Do I really own my stocks? ›
When you buy shares, you generally won't receive any certificate. The broker holds onto it, and it will likely be registered in its name. Usually, securities are held in "street name," meaning you own the shares, but they are registered in the broker's name and held by it on your behalf.
Is stock an asset or equity? ›
Common stock represents ownership in a company and represents a claim on the company's assets and earnings. It is recorded as a equity on the balance sheet, along with other ownership interests such as preferred stock and retained earnings.
Are stock accounts considered assets? ›
A business can have assets, too, that might include loans made, stock, cash on hand and cash in the bank, as well as accounts receivable. The business's other assets might include real estate, office property, vehicles, inventory and even books of business (the client base).
Is a stock an asset or expense? ›
If the stock is a long-term investment, it would be classified as an other asset. If the stock is a short-term investment, it would be classified as a current asset. If the stock is part of the company's operating expenses, it would be classified as an expense.
Does stock count as a current asset? ›
Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. The Current Assets account is important because it demonstrates a company's short-term liquidity and ability to pay its short-term obligations.
Is a stock considered a financial asset? ›
financial asset
a contractual claim to something of value; modern economies have four main types of financial assets: bank deposits, stocks, bonds, and loans.
