Asset – definition
Investment assets are also called instruments and can be bought or sold to generate income
When we talk about an asset, we normally mean something that gives the holder or the owner a benefit. In the case of a financial asset, that benefit is money.
Investment assets are bought with the intention of generating a profit or an income, or sometimes both.
An asset is something tangible that can be bought – Jack Dorsey’s first ever tweet was sold for $2.9m in March 2021.
Some assets have to be sold to generate money but others don’t. For example, shares pay their holders a dividend every year or few months, which means the longer a share is owned, the more the holder can make from it. They also benefit from the share price if it goes up.
However, the share owner takes the risk that the company might not do well.
A property that is bought for investment purposes and then rented out earns its owner rental income as well as offering the potential to make more money if the price of the property goes up and they sell it.
Investable assets take different forms but they are all tangible, in that they are something you can hold and feel.
The world’s stock markets also trade assets, which are a hybrid of intangible and tangible. An example of this is a futures contract. These are financial instruments that commit investors to buying a share or a commodity at a set price in the future.
What is an asset?
Financial assets include:
Shares – also known as equities, they allow investors to own a proportion of a company, hence the word share.
Bonds – also known as fixed-interest stocks, these are issued by governments and large companies, and they pay investors a fixed interest income in exchange for lending them a lump sum of money. This lump sum is often the capital.
Property – this can be bought outright or through a loan (normally called a mortgage).
Commodities – oil and crops, such as soya and wheat, are all sold on the world’s stock markets using financial instruments.
Valuables – such as artwork, artefacts and jewellery.
Cash – this can include currencies and savings accounts.
Specific assets have similar characteristics to others in the same class and are governed by the same regulations.
For example, shares are traded globally and their trade is monitored carefully via the stock exchange and the regulator in the country where the company is based.
What assets do
The price of shares tends to follow a trend. Shares are one of the most efficient ways to make money, but they often have to be invested for a long period of time, to even out stock market volatility.
Commodities, such as oil, are also regulated and the price of commodities is subject to supply and demand.
Bonds are another asset class. They are a form of debt; governments use bonds to raise money for infrastructure projects. Government bonds are often bought by large financial institutions as an extra form of security, because a government is unlikely to pay back the loan and the interest.
The technology used to develop cryptocurrency is making it easier to sell artwork and even digital audio via non-fungible tokens (NFTs).
Assets and risk
All investments carry some amount of risk. Because different assets behave differently, experienced investors choose to diversify by investing their money in different assets.
A government bond may offer some security and regular income but it might not offer the same potential as investing in cryptocurrency or the shares of a newly listed company; however, the potential to lose money may be greater.