FINANCIAL ASSETS CATEGORIES BASIC AND TUTORIALS

WHAT ARE THE CATEGORIES OF FINANCIAL ASSETS?


The following are five key categories of assets:
1. Money
2. Stocks
3. Bonds
4. Foreign exchange
5. Securitized loans

We now briefly discuss these five key assets.

Money
Although we typically think of “money” as coins and paper currency, even the narrowest government definition of money includes funds in checking accounts. In fact, economists have a very general definition of money: Money is anything that people are willing to accept in payment for goods and services or to pay off debts.

The money supply is the total quantity of money in the economy. money plays an important role in the economy, and there is some debate concerning the best way to measure it.


Stocks
Stocks, also called equities, are financial securities that represent partial ownership of a corporation.When you buy a share of Microsoft stock, you become a Microsoft shareholder, and you own part of Microsoft, although only a tiny part because Microsoft has issued millions of shares of stock.

When Microsoft sells additional stock, it is doing the same thing that the owner of a small firm does when she takes on a partner: increasing the funds available to the firm, its financial capital, in exchange for increasing the number of the firm’s owners.

As an owner of a share of stock in a corporation, you have a legal claim to a share of the corporation’s assets and to a share of its profits, if there are any. Firms keep some of their profits as retained earnings and pay the remainder to shareholders in the form of dividends, which are payments corporations typically make every quarter.

Bonds
When you buy a bond issued by a corporation or a government, you are lending the corporation or the government a fixed amount of money. The interest rate is the cost of borrowing funds (or the payment for lending funds), usually expressed as a percentage of the amount borrowed. For instance, if you borrow $1,000 from a friend and pay him back $1,100 a year later, the interest rate on the loan was $100/$1,000 = 0.10, or 10%.

Bonds typically pay interest in fixed dollar amounts called coupons. When a bond matures, the seller of the bond repays the principal. For example, if you buy a $1,000 bond issued by IBM that has a coupon of $65 per year and a maturity of 30 years, IBM will pay you $65 per year for the next 30 years, at the end of which IBM will pay you the $1,000 principal.

A bond that matures in one year or less is a short-term bond. A bond that matures in more than one year is a long-term bond. Bonds can be bought and sold in financial markets, so, like stocks, bonds are securities.

Foreign Exchange 
Many goods and services purchased in a country are produced outside that country. Similarly, many investors buy financial assets issued by foreign governments and firms. To buy foreign goods and services or foreign assets, a domestic business or a domestic investor must first exchange domestic currency for foreign currency.

For example, consumer electronics giant Best Buy exchanges U.S. dollars for Japanese yen when importing Sony televisions. Foreign exchange refers to units of foreign currency. The most important buyers and sellers of foreign exchange are large banks.

Banks engage in foreign currency transactions on behalf of investors who want to buy foreign financial assets. Banks also engage in foreign currency transactions on behalf of firms that want to import or export goods and services or to invest in physical assets, such as factories, in foreign countries.

Securitized Loans 
If you lack the money to pay the full price of a car or house in cash, you can apply for a loan at a bank. Similarly, if a developer wants to build a new office building or shopping mall, the developer can also take out a loan with a bank.

Until about 30 years ago, banks made loans with the intention of making profits by collecting interest payments on a loan until the loan was paid off. It wasn’t possible to sell most loans in financial markets, so loans were financial assets but not securities.

The federal government and some financial firms created markets for many types of loans. Loans that banks could sell on financial markets became securities, so the process of converting loans into securities is known as securitization.

To take one example, a bank might grant a mortgage, which is a loan a borrower uses to buy a home, and sell it to a government-sponsored enterprise or a financial firm that will bundle the mortgage together with similar mortgages granted by other banks.

This bundle of mortgages will form the basis of a new security called a mortgage-backed security that will function like a bond. Just as an investor can buy a bond from IBM, the investor can buy a mortgage-backed security from the government agency or financial firm.

The banks that grants, or originates, the original mortgages will still collect the interest paid by the borrowers and send those interest payments on to the government agency or financial firm to distribute to the investors who have bought the mortgage-backed security.

The bank will receive fees for originating the loan and for collecting the loan payments from borrowers and distributing them to lenders.

Note that what a saver views as a financial asset a borrower views as a financial liability. A financial liability is a financial claim owed by a person or a firm. For example, if you take out a car loan from a bank, the loan is an asset from the viewpoint of the bank because it represents a promise by you to make a certain payment to the bank every month until the loan is paid off. But the loan is a liability to you, the borrower, because you owe the bank the payments specified in the loan.