Financial assets, also referred to as securities, are intangible assets such as corporate stocks and bonds [1]. Here's a breakdown of their key aspects, how they differ from physical assets, and their role in the investment landscape:

Key Features of Financial Assets:

• Claims on Real Assets: Financial assets represent claims against the income generated by real assets [1].
• Divisibility: Financial assets are easily divisible, allowing investors to buy or sell small portions of an asset like common stock [2].
• Marketability: Many financial assets are marketable securities that can be easily bought and sold [3, 4]. This ease and speed of trading without significant price concessions contribute to their liquidity [4].
• Information Availability: Information about financial assets is readily available through various sources like the Wall Street Journal, the Financial Times, the Internet, or brokers [5].

Financial Assets vs. Real Assets

• Tangibility: Physical assets are tangible, while financial assets are intangible [1].
• Income Generation: Physical assets are income-generating assets used to produce goods or services. Financial assets, in contrast, represent claims against the income generated by real assets [1].
• Balance Sheet Representation: Real assets appear only on the asset side of a balance sheet, whereas financial assets appear on both sides [6].
• Creation and Destruction: Financial assets are created and destroyed in the ordinary course of business, while real assets are typically destroyed by accident or wearing out over time [7].

Types of Financial Assets:

• Money Market Securities: These are short-term securities with maturities of less than one year. Examples include Treasury bills, commercial paper, and negotiable certificates of deposit [8]. Money market instruments are often called cash equivalents and are marketable, liquid and low risk [3].
• Bonds: Bonds are debt instruments representing a creditor relationship with an entity [8]. They are longer-term and riskier securities, with returns exposed to interest-rate risk and, in the case of corporate bonds, credit risk [8, 9]. Bonds call for payment of the par value at the end of the bond's life [10].
• Stocks: Stocks represent an ownership position in a corporation [8].
• Derivative Securities: Also known as contingent claims, these securities, such as options and futures, derive their value from the performance of another security [8, 9]. Derivative securities have the highest potential risk level as well as the highest potential return [8].

Role in the Economy:

• Facilitating Investment: Financial assets facilitate the transfer of funds to enterprises with attractive investment opportunities [11].
• Allocation of Income: Financial assets define the allocation of income or wealth among investors [12].
• Household Investment Decisions: Households make financial decisions about how to invest money [13, 14].
• Channeling Savings: Financial intermediaries channel household savings to the business sector [15].

Risks in Financial Assets:

• Market Risk: Exposure to general risk factors like interest rates, exchange rates, stock indices, and market liquidity [16].
• Credit Risk: The risk that a counterparty will default on its obligations and the risk that the creditworthiness will change [16].
• Operational Risk: Risk resulting from inadequate or failed internal processes, people, and systems, or from external events [16].
• Model risk: Risk that investor may be unable to capture investment risks effectively due to the incorrect specification, poor data feeding or erroneous use of models [17].