REAL VS FINANCIAL ASSETS | MEANING | DIFFERENCES
Real and financial assets are two types of assets that are distinguished by their characteristics, uses, and values. Understanding the differences between these two types of assets can help individuals and businesses make more informed investment decisions and manage their assets more effectively.
Real Assets:
Real assets are tangible or physical assets that have intrinsic value and can be used to generate income or provide utility. Examples of real assets include real estate, land, buildings, machinery, equipment, natural resources, commodities, and other physical goods. These assets are typically used for production, consumption, or both, and have value that is derived from their physical properties.
Real assets are often used by businesses to produce goods and services, generate income, and create value. They can also be used for personal consumption or enjoyment, such as owning a home or a vacation property. Real assets have a physical presence and can be seen, touched, and used, making them more concrete and tangible than financial assets.
Real assets have several characteristics that distinguish them from financial assets. They tend to be less liquid, meaning they are more difficult to buy or sell quickly without affecting their market value. Real assets also tend to have a longer lifespan and are subject to wear and tear, depreciation, and obsolescence, which can affect their value over time. However, real assets can provide a hedge against inflation, as their value tends to rise with the cost of living.
Financial Assets:
Financial assets are intangible assets that derive their value from a contractual claim or ownership interest in an underlying real asset or cash flow. Examples of financial assets include stocks, bonds, options, futures, and other securities. These assets are typically used for investment purposes and are traded in financial markets, allowing investors to buy and sell them for profit.
Financial assets are often used by investors to generate income, hedge against risk, and diversify their portfolios. They are usually easier to buy and sell than real assets, as they can be traded electronically in financial markets. Financial assets can also provide a higher return on investment than real assets, but they are also subject to higher volatility and risk.
Financial assets have several characteristics that distinguish them from real assets. They are more liquid, meaning they can be bought and sold quickly without affecting their market value. Financial assets also have a shorter lifespan and are not subject to wear and tear or obsolescence, as they represent a contractual claim or ownership interest in an underlying real asset or cash flow.
Differences between Real and Financial Assets:
1. Tangibility: Real assets are tangible, meaning they have a physical presence and can be seen, touched, and used. Financial assets are intangible, meaning they do not have a physical presence and represent a contractual claim or ownership interest in an underlying real asset or cash flow.
2. Intrinsic Value: Real assets have intrinsic value, meaning they have value that is derived from their physical properties and usefulness in production or consumption. Financial assets derive their value from the underlying real asset or cash flow they represent.
3. Use: Real assets are typically used for production, consumption, or both. Financial assets are typically used for investment purposes.
4. Lifespan: Real assets have a longer lifespan and are subject to wear and tear, depreciation, and obsolescence. Financial assets have a shorter lifespan and are not subject to wear and tear or obsolescence.
5. Liquidity: Real assets are less liquid, meaning they are more difficult to buy or sell quickly without affecting their market value. Financial assets are more liquid, meaning they can be bought and sold quickly without affecting their market value.
6. Return on Investment: Real assets can provide a hedge against inflation, but they may not provide as high a return on investment as financial assets. Financial assets can provide a higher return on investment, but they are subject to higher volatility and risk.
