As you work towards achieving your financial goals, it is essential to understand the different types of financial assets available and how they can help you build your wealth over time. In this article, we will define financial assets and explore the various investments you can make to grow your money.
What are Financial Assets?
Financial assets refer to any asset with monetary value that can be traded in a financial market.
They include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), commodities, currencies, and more. These assets give your portfolio a chance to grow in value, generate revenue, and diversify.
Types of Financial Assets
1. Stocks
Stocks represent ownership in a company and are bought and sold on stock exchanges such as the Nigerian Exchange Group (NGX), New York Stock Exchange (NYSE), Nasdaq, etc. Their prices are determined by supply and demand in the market. The value of a stock can also fluctuate based on the company’s financial performance, industry trends, and macroeconomic conditions.
2. Bonds
Bonds are debt securities that have been offered by businesses, communities, or governments. They can aid in portfolio diversification and offer a fixed revenue stream in the form of interest payments.
3. Mutual Funds
Mutual funds are a type of financial asset that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. Investing in a mutual fund is similar to purchasing a share of the fund, which exposes you to a variety of assets chosen and administered by a qualified fund manager.
4. Exchange-Traded Fund
Exchange-Traded Funds (ETFs) are a type of financial asset that tracks the performance of an underlying index, such as the S&P 500 or Nasdaq. ETFs can be a useful addition to an investor’s portfolio because they give the chance to invest in diversified securities at a lower cost than conventional mutual funds.
5. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are a type of financial asset that invests in income-generating real estate properties. By investing in REITs, investors can gain access to a diverse portfolio of real estate assets as well as possible regular income and capital growth.
Importance of Financial Assets
Long-Term Growth Potentials
When compared to other long-term investment choices like savings accounts or certificates of deposit, financial assets like stocks, bonds, mutual funds, and real estate historically have offered higher returns.
Income Generation
Bonds and stocks that pay dividends are examples of financial assets that offer a consistent revenue stream in the form of interest or dividend payments. This can be a valuable source of passive income to supplement your regular earnings.
Diversification
Investing in a variety of financial assets can help you spread your risk and protect your portfolio from market volatility.
Liquidity
Many financial assets have high liquidity, making it easy to buy and sell them on financial marketplaces. This provides investors with greater flexibility, allowing them to adjust their portfolios as market conditions change or their financial goals evolve.
Hedge Against Inflation
As prices rise over time, the value of your money decreases. Certain types of financial assets, such as stocks and real estate, have historically provided a hedge against inflation by increasing in value over time.
What is a Non-Financial Asset?
A non-financial asset is a type of asset that cannot be quickly converted into cash or involve any monetary value.
Physical assets like real estate, land, tools, or equipment as well as intangible assets like patents, trademarks, or goodwill are examples of non-financial assets.
Non-financial assets, in contrast to financial assets, are usually used in the production of goods and services and are often not meant for resale.
What is Financial Liability?
A financial liability is a legal duty or requirement to fulfil debts or other financial commitments.
It can be loans, mortgages, credit card bills, payables, and other debts that call for repayment or settlement in the future.
Financial liability can be classified as either short-term or long-term, depending on the time frame for repayment.
Bottom Line
Investing in financial assets can be a great way to build your wealth over time. By diversifying your portfolio and investing in a mix of stocks, bonds, mutual funds, ETFs, and REITs, you can potentially earn higher returns and generate passive income.
Always do your research before investing in any financial asset, or reach out to your trusted financial advisor.
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