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.
Is it realistic to have 100% of your portfolio in stocks? ›
What explains the superior performance of the 100% international equity portfolio? Stocks have a much higher expected return than treasury bills and bonds. The authors estimate real expected stock returns to be four times those of bonds. After a period of decline, stocks tend to rebound.
Are stocks a good asset? ›
Stocks typically have potential for higher returns compared with other types of investments over the long term. Some stocks pay dividends, which can cushion a drop in share price, provide extra income or be used to buy more shares.
What are examples of real assets? ›
What are real assets?
- Real estate, including real estate investment trusts (REITs). Land and commercial properties including apartments, offices, warehouses, and malls, etc.
- Infrastructure. ...
- Commodities.
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.
Is a stock a current asset or not? ›
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.
How to invest $100 to make $1000? ›
10 best ways to turn $100 into $1,000
- Opening a high-yield savings account. ...
- Investing in stocks, bonds, crypto, and real estate. ...
- Online selling. ...
- Blogging or vlogging. ...
- Opening a Roth IRA. ...
- Freelancing and other side hustles. ...
- Affiliate marketing and promotion. ...
- Online teaching.
Basically, both the new and old version of this argument for 100% equities come down to the rather trivial observation that the asset with (as supported by both theory and long-term empirics) a higher expected return (stocks) has, on average, a higher realized return.
How much do you need to invest in stocks to become a millionaire? ›
Assuming that you can earn this 10% average return over your investing career, if you are getting started investing this year and you want to become a millionaire in 30 years, you would need to invest $506.60 per month. This amount may seem like a lot, but it may actually be pretty doable for many people.
Is investing $1 in stocks worth it? ›
Investing $1 a day not only allows you to start taking advantage of compound interest. It also helps you to get comfortable with investing and develop the habit of putting your money to work for you. As you can see, that single dollar can make a huge difference in helping you to become more financially secure.
Stocks have historically proven to be a reliable hedge against inflation. Inflation erodes the purchasing power of your money over time, but stocks have the potential to provide returns that outpace inflation. By investing in stocks, you can help ensure that your portfolio retains its real value over the long term.
Is it better to invest in stocks or bonds? ›
Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.
Should I invest in real assets? ›
Exposure to real assets can help investors hedge against inflation and diversify their portfolios while generating predictable income streams. Investors can explore opportunities in infrastructure, real estate and natural resources that may benefit from economic growth trends.
Do real assets have value? ›
This direct link to hard assets means real assets often store long-term value better than more traditional investments. Their intrinsic value may also increase due to higher utilization, greater demand or scarcity of supply.
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.
Are stocks real or personal property? ›
Personal property are movable items that people own. Personal property can be intangible, such as stocks and bonds, or tangible, such as clothes or artwork.
Do stock shares count as assets? ›
Almost everything you own and use for personal or investment purposes is a capital asset. Examples of capital assets include a home, personal-use items like household furnishings, and stocks or bonds held as investments.
Do I actually own stocks? ›
Most people realize that owning a stock means buying a percentage of ownership in the company, but many new investors have misconceptions about the benefits and responsibilities of being a shareholder. Many of these misconceptions stem from a lack of understanding of the amount of ownership that each stock represents.
Are stock accounts considered assets? ›
Here are some of the types of asset accounts: Brokerage account: These accounts typically hold stocks, bonds and mutual funds.
