Financial assets are those liquid assets that arise from contractual agreements from owning equity instruments of another organization.
Financial assets get their value from a contractual right and do not necessarily have a physical worth.
There are two types of financial assets including current or non-current assets. The common types of financial assets are bank deposits, cash, and cash equivalents, loans, receivables, derivatives, etc. Different types of financial assets are described below:
1) Fixed Deposit
Fixed deposit is a facility offered by banks and non-banking financial institutions. The deposited money gets a higher interest rate in fixed deposits than in savings accounts.
Fixed deposits can be easily renewed and are the safest investment instruments. Interest earned from the fixed deposit is taxable and the tax is deducted at the source.
2) Cash and Cash Equivalents
Cash and cash equivalents are highly liquid assets, including cash, cheques, treasury bills, and other short-term investment securities.
When companies have healthy amounts of cash and cash equivalents, they have the ability to meet short-term debt obligations. The maturity period of cash equivalents is three months or less.
3) Accounts Receivables
The proceeds that companies will receive from their customers are accounts receivables. Accounts receivables may generate interest if the payment is not made within the credit days.
The credit days are usually 30 to 90 days. In the balance sheet accounts receivables are showed as current assets.
4) Equity Shares
Equity shares are ordinary shares that give the owners the right to vote, receive dividends, and have last claims in the event of liquidation.
Equity share is important because it represents an investor’s stake in a company. Shareholder’s equity can be calculated as a company’s share capital plus retained profits minus its total liabilities.
When shareholder’s equity is positive, the company has sufficient assets to recover its liabilities.
When shareholder’s equity is negative, it indicates balance sheet insolvency. There are many types of equity shares authorized share capital, paid-up capital, right share, bonus share, etc.
A bond is a financial asset that represents a loan to a borrower by an investor for a fixed rate of interest for a certain period. Bonds have maturity dates when the original amount should be paid back.
Governments and corporates generally use bonds to borrow money. Some bonds are publicly traded, some are traded over the counter and some are traded privately to the parties.
6) Preference Shares
Preference shares give the shareholders the right to receive dividends, but the shareholders do not have any voting rights.
Preference shares are for risk-averse equity investors because whether a company earns a profit or incurs a loss a fixed rate of dividend will be given to preference shareholders.
7) Mutual Funds
A mutual fund is a type of financial asset with three possible ways of earning income: Income from dividends, stocks, and interest earned from bonds.
Mutual fund institutions pool money from the public and use the money to buy different types of securities.
Professionals manage mutual funds and they charge annual fees for their service. Mutual funds’ investments are also diversified which helps in reducing risks.
8) Insurance Contracts
Underinsurance contract a party accepts significant insurance risk and agrees to compensate the other party under the terms and conditions of the contract.
The insurer gives protection for losses occurred due to unexpected events.
9) Share-based Payments
Share-based payment is an agreement between two parties where transactions are settled in cash, other assets, or equity instruments.
It is a transaction where an entity receives goods or services as consideration for its equity instruments.
Some examples are employee share purchase plans, employee share ownership plans, share option plans, etc.
A derivative is a contract whose value is based on underlying financial assets. The most commonly used derivatives are options, swaps, futures, forwards, and warrants.
Derivatives are used for mitigating risks or making speculation on an instrument. Securities and Exchange Commissions regulate some derivatives and some are traded over the counter. If used properly, derivatives can be a helpful financial tool.
11) Employee Benefit Plans
Employee benefits are those that are given to employees other than salaries, which may include medical insurance, overtime, vacation, retirement benefits, etc.
Employee benefits are an important financial tool that can differentiate a business from competitors.
Employee benefits schemes include employee benefits trust, share incentives plans, long-term incentive plans, profit sharing share plans, employee share ownership plans, differed compensation plans, etc. Employee benefits attract, retain, and motivate employees.