Last time we learned that assets come in many forms.
We discussed collectibles such as paintings, antiques and vintage wines and compared them briefly to financial assets such as companies, unit trusts and bonds, for example.
We said that collectibles have a physical, tangible nature to them such as the ability to see them, touch them, or drink them!
In contrast, financial assets are intangible.
You can’t see them, touch them, etc. other than to look at a statement, certificate or something that confirms you as their owner.
In many ways it’s a bit like having cash in a bank account.
You can’t see your cash physically sat in a bank vault but you can see a number on a bank statement to confirm it exists and that it belongs to you.
Whilst financial assets therefore sound very dull and boring in comparison, they do have some advantages which we will explore now.
Easier to own
Firstly, because financial assets are not physical, you won’t need space to store them.
Similarly, you won’t need to pay high premiums for contents insurance in case they get damaged, lost or stolen.
These days, most financial assets are held in nominee accounts which are like bank accounts.
You have a statement or can view your account on-line over the internet to confirm that you are the owner just like you can with cash deposits at your bank.
In the past, you had certificates, pieces of paper, which confirmed you as the owner and you had to keep these safe and produce them again when you sold the assets.
These days though, these are rare and nominee accounts, or similar, are the norm.
Easier to value
Secondly, and more importantly, financial assets can be valued more easily because most of them are quoted on an exchange where they are being traded constantly, day in, day out.
This means that you can easily value your portfolio of financial assets at any point in time and know what they are worth.
Contrast this with a collectible.
You might have paid £500 for a painting 10 years ago but how much is it worth today?
The only way you can find out is to find a buyer and you won’t know if the price offered is a fair price unless you have lots of buyers bidding, say at an auction.
Even then, the price you receive will depend on how many like-minded collectors are present at the auction on the day you sell.
For the economists amongst you, an exchange is close to a perfect market whereas an auction is closer to being an imperfect market.
Source of income
Thirdly, many financial assets can also generate an income, called a dividend, whilst you are owning them.
Indeed, it is sometimes possible to make more money from the dividend income than you do from the act of buying and selling the asset itself.
This aspect of financial assets is predominantly why pension schemes invest in them rather than collectibles, say.
Pensioners require an income from their investments as opposed to lump sums every now and then so financial assets are much more suitable and more flexible.
Easier to trade
Fourthly, as I said earlier, financial assets are being traded day in, day out on financial exchanges.
This means that they are easier to buy and sell than paintings, antiques or fine wines.
You don’t have to go looking for a buyer or seller.
You don’t have to haggle and negotiate a price.
You don’t even have to worry about dodgy dealers selling you a fake.
That’s because the exchanges where financial assets are traded are regulated and properly policed.
Traders, brokers and the like (people who buy and sell at the exchange on our behalf) are licenced and their business depends on building trust with their customers.
The minute they break this bond of trust, its ‘game over’ for their business!
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