Key Takeaways
- Stocks are financial assets, not real assets, as they can be quickly converted to cash and derive value from ownership claims.
- Real assets are tangible, such as real estate, equipment, and commodities, possessing intrinsic value due to their physical properties.
- Financial assets like ETFs or REITs may hold real assets, but their value still primarily depends on the underlying physical assets.
- The distinction between real and financial assets helps investors manage risk and balance their portfolios.
- Understanding the nature of assets is crucial for making informed investment decisions.
An asset is something that’s owned by an individual or business and has value. It can be used to meet debts and obligations. The total of an entity’s assets minus its debts determines its net worth. Financial assets are paper assets that can easily be converted into cash. Real assets are tangible and therefore have intrinsic value. The definition of a financial asset best describes stock.
Assets that are easily converted to cash are referred to as liquid assets. Those that can’t be easily converted are physical assets. They include real estate and plant equipment. We’ll explore these distinctions in detail.
Comparing Real Assets and Financial Assets
Assets are referred to as “real” when they can be seen and touched. They’re most often tangible assets with physical properties. A company truck, a building owned by an entity, a piece of farm equipment, and a house are all examples of real assets.
Financial assets such as stocks or bonds can’t be seen or touched but they represent value to the entity that owns them. Stocks and other financial assets can also be converted to cash quickly when needed, unlike most real assets. This makes them highly liquid. Companies want a mix of real and financial assets but the ideal breakdown between the two varies greatly by industry.
Additional Considerations
Some financial assets invest in real assets such as mutual funds or exchange-traded funds (ETFs) that hold commodities like gold or silver. These pooled investments hold hard assets but they’re financial assets themselves. Overlap and confusion over asset categorization can occur with these types of investments.
Important
ETFs can invest in companies that are involved in the use, sale, or mining of real assets. More directly linked ETFs can aim to track the price movement of a specific real asset or a basket of real assets.
Physically-backed commodity ETFs include some of the most popular in the world based on volumes. State Street’s SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) are examples. Both invest in precious metals and seek to mirror the performance of those metals. These ETFs are financial assets, however. The actual gold or silver bullion they own is the real asset.
Real estate investment trusts (REITs) are another example. They invest in real properties ranging from residential to commercial developments. They hold real assets as well but REITs themselves are financial assets with values that depend on the underlying real assets.
What Is a Tangible Asset?
A tangible asset can be touched. This might seem like a gray area because you might have a patent that’s printed on a piece of paper. You can touch the paper but you’re not touching the patent so it’s not a tangible asset. You’re touching something that represents the patent.
Assets like inventory, real estate, and vehicles are physical items that you can place your hands on.
What Is a Commodity ETF?
A commodity ETF is an exchange-traded fund that invests in natural resources. These can include metals or agriculture. They offer diversification but commodities can be volatile.
How Does a Real Estate Investment Trust Work?
A real estate investment trust (REIT) invests in, operates, and manages income-producing properties that are often commercial real estate such as office buildings and malls. These properties can be prohibitively expensive for the average investor. Investing in a REIT gives investors access to properties that they wouldn’t ordinarily be able to hold.
Many are registered with the SEC and are publicly traded.
The Bottom Line
Stocks aren’t real assets. You can’t touch them or physically hold them in your hands. Real assets are tangible items such as precious metals, equipment, and real estate. It’s not always that clear-cut, however. A trust or other investment vehicle might hold real estate. The real estate is a real asset but the trust itself is not.
Companies and investors often choose a balance between real and financial assets to counter volatility issues and other risks. Consider speaking with an advisor if you’re not clear about the nature of an investment you’re considering.
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