What is Financial Assets ?

By Piseth Mao

An asset is anything of value owned by a person or a firm. A financial asset is a financial claim; it means that if you own a financial asset, then you have a claim on someone else to pay you money. For example, a bank checking account is a financial asset because it represents a claim you have against a bank to pay you an amount of money equal to the dollar value of your account.

Economists divide financial assets into those that are securities and those that aren’t. A security is tradable, which means that it can be bought and sold in a financial market.

Financial markets are places or channels for buying and selling stocks, bonds, and other securities, such as the New York Stock Exchange or Cambodia Securities Exchange ,but in CSX currently you can buy only stock.

If you own a share of stock in Apple or Google,or Phnom Penh Water Supply (PPWSA), you own a security because you can sell that share in the stock market. If you have a checking account at Citibank or Campu bank, you can’t sell it. So, your checking account is an asset but not a security.

The following are example of five key categories of assets:

1. Money

2. Stocks

3. Bonds

4. Foreign exchange

5. Securitized loans

  

 Money  

is anything that people are willing to accept in payment for goods and services or to pay off debts.

Stocks 

is  also called equities, are financial securities that represent partial ownership of a corporation or  a public company..When you buy a share of Phnom Penh Water supply stock (PPWSA), you become a PPWSA shareholder, and you own part of PPWSA, although only a tiny part because PPWSA has issued millions of shares of stock. When PPWSA 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 or public company, you have a legal claim to a share of the corporation’s assets and to a share of its profits,  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. Example, 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  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 ANZ rolyal Bank that has a coupon of $65 per year and a maturity of 30 years, ANZ rolyal Bank will pay you $65 per year for the next 30 years, at the end ANZ rolyal Bank 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. It looks the same as  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. Then 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.

In short, Securitization The process of converting loans and other financial assets that are not tradable  into securities. 

Reference: 

         Money, Banking, and the Financial System by

• R. GLENN HUBBARD and ANTHONY PATRICK O’BRIEN

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