Real Assets versus Financial Assets Real assets are auto plants, knowledge, and machine that are

used to produce goods and services. Whereas financial assets are claims such as securities to the income generated by real assets. We begin by examining the differences between financial assets and real assets. Then we proceed to the three broad sectors of the financial environment: households, businesses, and government. The material wealth of a society is determined ultimately by the productive capacity of its economy - the goods and services that can be provided to its members. This productive capacity is a function of the real assets of the economy: the land, buildings, knowledge, and machines that are used to produce goods and the workers whose skills are necessary to use those resources. Together, physical and "human" assets generate the entire spectrum of output produced and consumed by the society. In contrast to such real assets are financial assets such as stocks or bonds. These assets, per se, do not represent a society's wealth. Shares of stock are no more than sheets of paper; they do not directly contribute to the productive capacity of the economy. Instead, financial assets contribute to the productive capacity of the economy indirectly, because they allow for separation of the ownership and management of the firm and facilitate the transfer of funds to enterprises with attractive investment opportunities. Financial assets certainly contribute to the wealth of the individuals or firms holding them. This is because financial assets are claims to the income generated by real assets or claims on income from the government. Real assets are income-generating assets, whereas financial assets define the allocation of income or wealth among investors. An operational distinction between real and financial assets involves the balance sheets of individuals and firms in the economy. Real assets appear only on the asset side of the balance sheet. In contrast, financial assets always appear on both sides of balance sheets. Your financial claim on a firm is an asset, but the firm's issuance of that claim is the firm's liability. When we aggregate over all balance sheets, financial assets will cancel out, leaving only the sum of real assets as the net wealth of the aggregate economy. Another way of distinguishing between financial and real assets is to note that financial assets are created and destroyed in the ordinary course of doing business. For example, when a loan is paid off, both the creditor's claim (a financial asset) and the debtor's obligation (a financial liability) cease to exist. In contrast, real assets are destroyed only be accident or by wearing out over time.

The wealth of a society is dependent on the productive capacity of its economy. This means all the goods and services that the members of one country can produce. This capacity is a function of the real assets of the economy. This consists of the land, buildings, machines, and knowledge that can be used to produce the goods and services within the country. In contrast, financial assets such as stocks and bonds is a hold of claims on real assets. This is because when you buy a stock, you receive nothing more than a certificate of purchase and this does not contribute directly to the productivity of the economy. Financial assets are basically claims to any income generated by real assets. If we are discussing bonds, then we are making claims on income from the government for loaning money. While real assets generate net income daily to the economy, financial assets is simply moving money from one person (or account) to the other. With this type of assets, you can choose to cash in now (sell your stocks), or continue your investment in hope of high returns in the end (long term stock or bond investment).

Following are the main characteristics of bonds: 1) A bond is a type of security that gives the holder a financial claim on the issuing company. When you invest in bonds, you are loaning money to the issuer, and you are entitled to receive regular interest payments as well as the full return of your principle at a maturity date. 2) Bonds in general are considered less risky than stocks because they carry the promise of returning the face value of the security to the holder at maturity. 3) Most bonds pay a fixed rate of interest income until they mature. 4) There are many different types of bonds such as government bonds, foreign currency bond, etc. Corporate bonds usually offer higher yields; Government bonds are usually referred to as risk-free bonds; Convertible bond gives the holder the right to convert it into common stocks of the issuer within specified time after issuance.

Bonds have a number of characteristics of which you need to be aware. All of these factors play a role in determining the value of a bond and the extent to which it fits in your portfolio. Face Value/Par Value The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures. A newly issued bond usually sells at the par value. Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds.

Coupon (The Interest Rate) The coupon is the amount the bondholder will receive as interest payments. It's called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However, this was more common in the past. Nowadays, records are more likely to be kept electronically.

Maturity The maturity date is the date in the future on which the investor's principal will be repaid. Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued).

Issuer

The issuer of a bond is a crucial factor to consider, as the issuer's stability is your main assurance of getting paid back. For example, the U.S. government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small - so small that U.S. government securities are known as risk-free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. A company, on the other hand, must continue to make profits, which is far from guaranteed. This added risk means corporate bonds must offer a higher yield in order to entice investors - this is the risk/return tradeoff in action.

Shares
Uncertain returns

Ownership in the Company Dividends Capital Gains You may indirectly share in the companys success by the value of your stock increasing. A change in the share value has many causes. Earnings current, but more importantly the expected future earnings is a major determinant of share price. If the earnings outlook appears rosy relative to competitors, other companies, other asset classes, etc., the share price should increase Limited Liability A corporation is an individual legal entity, separate from its shareholders. Voting Rights While common shareholders do not have a direct say in the companys operations, they do have some influence through their voting rights.

Preferred Stock
Callability Preferreds technically have an unlimited life because they have no fixed maturity date, but they may be called by the issuer after a certain date. Convertibility As with convertible bonds, preferreds can often be converted into the common stock of the issuing company. This feature gives investors flexibility, allowing them to lock in the fixed return from the preferred dividends and, potentially, to participate in the capital appreciation of the common stock.

Payments Preferreds pay dividends. These are fixed dividends, normally for the life of the stock, but they must be declared by the company's board of directors. As such, there is not the same array of guarantees that are afforded to bondholders. This is because bonds are issued with the protection of an indenture. With preferreds, if a company has a cash problem, the board of directors can decide to withhold preferred dividends; the trust indenture prevents companies from taking the same action on bonds.

Higher fixed-income payments than bonds or common stock Lower investment per share compared to bonds Priority over common stocks for dividend payments and liquidation proceeds Greater price stability than common stocks Greater liquidity than corporate bonds of similar quality

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