Real Assets and Financial Assets - What are the differences?

There are two types of assets associated with a company - Real Assets and Financial Assets. Real assets are needed to continue operations and financial assets are non-physical assets that can be converted to cash easily. Real assets are called real because they often have a real form that can be touched or felt. Financial assets on the other hand are mostly found only as records.

Real Assets and Financial Assets

Real assets help companies to generate revenue and are important because they have an intrinsic value related to them. The intrinsic value depends on the substance and properties of the assets. Real assets are popular with investors because they come with some attractive benefits - less correlation with equity, tax benefits, and protection from inflation,and attractive returns.

Financial assets do not have any intrinsic value of their own but they represent another underlying asset that has some value. The financial assets' monetary value can't be obtained unless it is converted to cash. Examples of financial assets include shares, bonds, and debentures.

Real assets are further divided into two parts −

  • Tangible assets that have a physical form, such as machinery, and

  • Intangible assets that do not have a physical form, such as copyrights.

NoteThe assets are mainly of two types - real and financial assets.

Lease Agreements

Financial assets may have lease agreements and offer a lessee the right to use the lessor's assets. This happens for an agreed amount of time and price. The applied funds by the lessee are called capital expenditure or investment. The firms that act as lessors usually expect returns on the investment and distribute them among investors.

Factors that Differentiate Real Assets and Financial Assets

Following are some of the factors that we can use to differentiate Real Assets and Financial Assets −

  • Valuation − Real assets have their own intrinsic value, while financial assets have their value for an underlying asset which can be intangible or tangible.

  • Hedging Inflation − Real assets help companies during inflation as they help to generate wealth with inflation. Financial assets may not offer any protection in the case of inflation.

  • Liquidity − Financial assets are more liquid than real assets. This is because real assets have a large value and there is no marketplace of their own.

  • Accounting − The measure of the value of real assets can be done in amortized form, as the depreciation of real assets need to be considered. The price of financial assets depends on their market value though.

  • Growth − Financial assets offer more opportunities for growth than real assets but they are riskier than real assets too.

NoteFinancial assets are easy to trade but they are riskier.

Updated on: 13-Aug-2021


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