In the past, saving for the rainy day was a cliché, and thought to be smart financial advice. However, as people have become more aware of the force of inflation and its negative impact on saved money, people now prefer to know how to build financial assets via investment rather than just savings.
Among the many investment vehicles available, investing in financial assets has turned out to be very popular among investors.
What are financial assets, how can one build financial assets, what are the benefits of having financial assets?
This article will be answering these questions and more!
Hang on as we begin.
What are Financial Assets?
According to Investopedia, financial assets are liquid assets that get their value from a contractual right or ownership claim. Examples of financial assets include cash, bank deposits, bonds, stocks, mutual funds, etc.
Financial assets are unlike physical assets, such as land, property, commodities, etc. as they do not have inherent physical worth, they are not even tangible. Rather, their value is shaped by the market forces of demand and supply.
Types of Financial Assets.
The following are some of the most popular types of financial assets available.
Certificate of deposit (CD)
The US securities and exchange commission defines a certificate of deposit as a savings account that holds a fixed amount of money for an agreed period, such as 6 months, a year, etc., and in exchange, the issuing bank pays interest to the holder.
So, if you invest in a certificate of deposit when you redeem it, you receive the actual amount you invested, in addition to the interest, it has accrued over time.
Certificates of deposit are considered to be one of the safest financial assets available. To learn more about them, see this article on certificate deposits.
Simply put, a bond is a loan from a creditor to a borrower such as a government or company. The borrower uses the loan to fund a project and then pays the creditor interest on the loan it took.
The rate of interest for bonds is usually fixed before the loan is collected. Long-term government bonds usually earn between 5% to 10% in average annual returns.
At the maturity of this loan, the original amount invested in the bond is paid back to the investors. In addition, investors also get some interest on the principal invested in the bond.
Investing in Bonds is relatively safe, in that they are prone to fewer fluctuations than stocks. The promised return is what you will often get at the maturity of your investment.
However, the major risk in bonds is the Creditworthiness of the issuer. If the issuer defaults, there is little that can be done. This why investors prefer investing in the bonds of reputable governments or organizations.
Types of bonds
Bonds differ according to the issuing body, and according to their date of maturity. Below are some of the most common bonds:
This is one of the safest types of bonds since it is backed by the federal government of a country. However, the major challenge with this type of bond is its low-interest rate.
The types of treasury bonds available in a financial market are determined by the issuing government. Advanced economies would have a more sophisticated array of treasury bonds compared to a developing economy.
Corporate bonds are issued by companies when they need to raise funds for a project or to maintain their operation.
Unlike stocks, corporate bonds do not offer investors ownership in the organization. Investors are just creditors that will be paid off at the maturity of the bond.
There are two types of corporate bonds. They are as follows:
- High yield bonds: This type of corporate bond offers higher interest rates than your regular bond. However, they have a lower credit rating, which increases the possibility of the organization defaulting in payments.
- Investment-grade corporate bonds: This type of corporate bond offers a lower interest rate. However, they have a higher credit rating, which means a lower risk of default at its maturity.
This type of bond is issued by states, cities, counties, and other government entities lesser than the central government of a country. They are usually issued by such governments to fund projects or ventures that are capital intensive.
Municipal bonds may come with certain incentives like tax benefits, to attract investors. Investors may be exempted from paying federal taxes on the interest they earn from these bonds.
They may also be exempted from local and state taxes if they are issued in the state or city where the investor lives.
Municipal bonds come in various terms. The short bonds mature between 1-3 years, while the long-term bonds may take over 10 years to mature.
Investopedia defines stock as a security that represents the ownership of a fraction of a corporation. Meaning that when an investor purchases the stocks of a company, he now owns a percentage of that company’s asset.
This also qualifies him to share from the company’s profit to a portion proportionate to the amount of stock they own in that organization. Units of stock are known as shares.
Companies issue stock to the public to raise funds for (new) products, projects, and other initiatives.
There are two types of stock – Common stock and Preferred stock.
Common stock refers to the usual type of stocks most investors buy in the stock market. Holders of this stock have a voting right per share to elect the board members of the corporation.
In addition, they are entitled to dividends from the profit of the organization.
However, if the company goes bankrupt, they are among the last set of persons to be paid. Bondholders, preferred shareholders, etc., are paid before common stockholders.
Preferred stockholders usually do not enjoy as much voting rights as the common stockholders enjoy. However, they also have some level of ownership of the organization.
Unlike common stockholders, preferred stockholders enjoy a guaranteed dividend throughout the period they will be owning the stocks. Regardless of market fluctuations, preferred stockholders always get their fixed dividend rate.
Finally, they get paid before common stockholders if the organization goes bankrupt.
How do investors make money from stocks?
There are several ways investors make money from the stock market. One of them is to buy some shares from a high-performing organization, and wait for the value to increase. Eventually, when the value increases, they sell and make a profit.
Some others, invest for the long term, buying and holding the stock of big corporations, and watch the value of the stock increase, as well as their financial worth. They also earn dividends from these corporations.
Some others “short the market”, and apply other means too broad to discuss in this article. You will find helpful resources on how investors make money from the stock market if you research it.
Related Article: How to create passive income streams
Other types of financial assets include:
- Bank deposits
- Loans and receivables: Loans and Receivables refer to assets with fixed or determinable payments. For instance, in banks, loans are assets as they can sell them to other parties as their business.
- Derivatives: Derivatives can be described as financial assets whose value is derived from other underlying assets. These are contracts
How To Build Financial Assets?
Like building a house, building financial assets is a process. To build your financial assets, follow these steps:
Build up your savings
Building financial assets involve discipline. And that discipline has to start by trimming your weekly or monthly expenses, so much so that you can have some cash left over to invest in financial assets.
Some folks erroneously think that they will not save until they have more money! Or that they will not save, instead, they will wait till they have a windfall before they invest in financial assets.
Firstly, many times, this windfall never comes. Leaving the person broke and frustrated.
Secondly, the notion that you will start saving when you have more money is wrong, because it has been economically proven that man’s expenses will continue to grow to meet up with any increase in his income.
That is why a person who could not save any money when he was earning $5,000, per month, will most likely not save a dime when he starts earning $9,000. He will often look for what to spend that extra money on.
Why is savings such a big deal?
Saving builds in you the discipline needed to grow your financial assets. The patience built as you save is the same patience that will help you build your financial assets and not spend it all as soon as you make any profit.
What’s more, the money saved will be employed to build your financial assets!
Hire a quality broker
Have you noticed that the best teams often have the best players available in the competition? Or that the highest paid professionals are often the best available in that industry or in that locality?
It is so because the best players often help you become the best or one of the best teams available.
As you build up your savings, avoid the temptation to look for a cheap broker. They are cheap, often because the quality of their advice is cheap.
Rather, seek a top-quality broker that can give you quality financial advice that will help you build your financial assets quickly.
Even though it may cost you a bit more to hire a quality broker, in the end, it is worth it. As they will help you make more money than what you spent paying them.
To get a top-quality broker, speak with your banker. They will help you locate a good one.
Study About Financial Assets
Having a great broker does not eliminate the need for you to know how the financial market works. Instead, it increases the need for you to understand how the market works so you don’t lose your hard-earned money.
In addition, learning how the financial market works will help you understand the financial advice you are getting and its implications.
You can get helpful resources on how the financial market works on the internet. All you need to locate them is a little research.
Invest with Caution
As you get investment advice from your broker, understand that she is not a sorcerer that can tell the future of the financial market.
On the contrary, the calculations their projections are based on is at best a clever guess!
They can be wrong.
So how do you ensure you never get burned or at least never get burned seriously?
Simply stick to less risky investments where your capital is safe and of course these types of investments have a lower interest. This will ensure your financial assets grow steadily.
Plow back Profits
This simply means to reinvest some, if not all of your earned interest/profit into other financial assets. This is because the more you have invested, the more interest you will earn from your investments.
Furthermore, the more you have invested, the more the value of your financial assets grows. This is how investment gurus like Warren Buffet accumulated the huge investment portfolios they have today.
Building financial assets requires sacrifices, and one of such sacrifices includes delaying your gratification. First take the time to build your financial asset portfolio, before you start reaping the rewards.
So, here you go!
These are the steps to building your financial assets. Of course, these steps are not exhaustive.
However, they cover major steps that you can start applying to build your financial assets!
Like you would expect, there are several benefits you enjoy when you build your financial assets. It pays beyond any sacrifice you may have to make.
Cheers to your success as you begin building your financial assets!