Real Assets Definition Example Real Asset Vs Financial Asset

Real Assets Definition

Real Assets are tangible assets that have an inherent value due to their physical attributes, and examples include metals, commodities, land, factory, building, and infrastructure assets. They are appealing to the investors as they provide good returns, hedge against inflation, lower covariance with equity investments, and tax benefits as they can claim depreciation on assets. They add to the investor’s portfolio value by maximizing returns and diversifying risks as they have lower covariance with other financial asset classes like shares and debt bonds.

Explanation

Assets may be categorized into various classes as real, financial, etc. Financial assets are liquid assets that hold value through ownership rights in the paid-up capital of any company. They hold some intrinsic value to a company or retail investorRetail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more as they can be traded for cash and hence are deemed assets. Intangible assets do not have a physical form like brands, patents, or trademarks. Still, a brand holds value to any business entity as it brings in patronage in the form of customers and addsIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more to a business because of the brand identity through which it identifies itself in the market and sets it apart from others in the market. Financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more are liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company’s balance sheet.read more that hold value through ownership right in the paid-up capital of any company.

Stocks, Long term debt bondsLong Term Debt BondsLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company’s balance sheet as the non-current liability.read more, bank deposits, or cash are classic examples of financial assets. Most companies hold a mix of tangible and financial assets. For example, a company may own a motor car, factory land, and building. However, it may also have certain intangible assetsCertain Intangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more like patents, trademarks, and intellectual property rights. Lastly, the company may have investments in its subsidiary companiesSubsidiary CompaniesA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more, termed financial assets. Stocks, Long term debt bonds, bank deposits, or cash are classic examples of financial assets. A mix of assets provides a good hedge against market risksMarket RisksMarket risk is the risk that an investor faces due to the decrease in the market value of a financial product that affects the whole market and is not limited to a particular economic commodity. It is often called systematic risk.read more as physical assets move in the opposite direction than financial assets. Real assets provide more stability but less liquidity as compared to financial assets.

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Example of Real Assets

From an investor’s point of view, real assets are assets that provide hedging against inflation, currency value fluctuation, and other macroeconomic factors. For example, a company owns real estate properties, and the fleet of vehicles and office buildings are real assets. However, it is a brand name that is not a real asset, even if it has a market value.

Real Asset vs. Financial Asset

Financial assets include stocks, bonds, and cash, while real assets are real estate, infrastructure, and commodities. Assets are the backbone and lifeblood of the economy, enabling us to create wealth.

Financial Assets are highly liquid assets that are either in cash or can be fast converted to cash. They include investments such as stocks and bonds. The major feature of financial assets is that it has some economic value that is easily realized. However, by itself, it has lesser intrinsic value.On the other hand, real assets are value-driven physical assets that a company owns. They include land, buildings, motor cars, or commodities. Its unique feature is that they have intrinsic value by themselves and don’t rely on exchanges to have value.

The similarities between real and financial assets are that their valuation depends on their cash flow generation potential.

The difference between them is that real assets are less liquid than financial assets since real assets are difficult to trade, and they don’t have a competitive and efficient exchange. They are more location-dependent, whereas financial assets are more mobile, making them independent of their location.

Advantages

Real assets have the advantage of stability as compared to financial assets. Inflation, currency valuation, and macro-economic factors have more bearing on finances than real.It has a strong negative correlation with financial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more.They are not dependent on financial market volatility. It is a profitable investment alternative for risk diversification and offers profitability, not related to or dependent on financial markets.They are a good hedge against inflation. When inflation is high, asset prices go up.Unlike the capital marketCapital MarketA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more, the real assets market is complete with inefficiencies. There is a lack of knowledge that makes the potential for profit high.It can be leveraged wherein real assets can be bought with debt.Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more from real assets like land, plant, and real estate projects provides the investors with sound and steady income streams.

Disadvantages

It has high transaction costs. When we buy sharesBuy SharesKnowing how to buy shares is crucial for a person who wants exposure to the equity market. Equity markets are volatile, and timing is very important. Shares trade in exchanges, but you just can’t go and buy a share from the exchange. There are several steps involved in purchasing a share.read more or stocks, the transaction costs are lower. But when buying it, the transaction costs are relatively high. The transaction costs can affect the value of investments, and it may not be easy to make a profit. It has low liquidity.Unlike financial assets that can be traded within a few seconds, these assets are comparatively less liquid as land and building capital assets can’t be easily traded without significant loss in value.Capital gains tax is applicable on the sale of real assets at a higher price. A property sold within three years of purchase will be subject to short-term capital gains tax, but long-term capital gains tax is applicable if sold after three years.The capital asset to be bought requires high capital investment. Because of high capital costs buying and selling it becomes a challenge. It is why people generally rely on borrowed funds to buy real assets.They also have higher maintenance costs than other forms of assets. The investment is illiquidIlliquidIlliquid refers to an asset that cannot be converted to cash. Such assets suffer a valuation loss when sold in exchange for cash. Bonds, stocks and properties are some examples of illiquid investment.read more and locks up a huge sum of capital, which is difficult to redeem.

Conclusion

It provides a steady and stable income to its investors, maximizing returns and diversifying risks, which in many ways balances the portfolio of investors as real assets have a negative correlation with other assets. But it requires huge capital investmentsCapital InvestmentsCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more and other risks as well.