Financial assets are an essential part of any strategy, both for individuals and businesses. These are investments that allow you to multiply your capital or protect your money from inflation. Financial assets can be divided into several types. It is worth remembering that each type has its own specific characteristics and carries both risks and potential benefits. In this article, we will take a closer look at long-term and short-term assets.
Financial assets – what is it?
Financial assets are a specific category of assets that include instruments of a financial nature and securities that can be bought, accumulated, and sold in the financial markets for the purpose of investing or speculating. Financial assets include various assets that are the value of the resources held. These assets can be divided into several categories, including monetary assets (i.e. cash, foreign currencies and foreign currencies) or the right to exchange, for example, securities or non-securities instruments with other entities on favourable terms. Financial assets are not only cash and cash equivalents, such as cheques and foreign bills of exchange. They also include: shares, bonds, shares in other companies, treasury bills, investment funds or futures.
Non-current financial assets
Long-term financial assets are investments and financial instruments that are held by a business entity or investor for an extended period of time (for example, 3 years). A key feature of this type of asset is that there are no plans to sell it quickly, as it is expected to generate profits in the long run.
Examples of long-term financial assets
- Stocks that require a longer investment horizon: investing in company shares for more than 12 months, with the intention of earning from the growth of the share value and receiving dividends.
- Bonds that require a longer investment horizon: these are bonds that have a maturity of more than 3 years. Investors receive interest for the duration of the bond and return the principal when it expires.
- Real estate investment: is the purchase of real estate (apartments, houses, or other various types of commercial buildings for rent). The goal is to generate rental income and a potential increase in the value of the property within a dozen or so years.
- Investments that require a longer investment horizon: These focus on investments in various assets, such as stocks and bonds.
Current financial assets
Short-term financial assets are investments and financial instruments that are held by an economic entity or investor for a relatively short period of time, usually not exceeding one year. A key feature of short-term financial assets is that investors expect faster returns or need cash in the near future.
Examples of short-term financial assets:
- Bank deposits: savings in bank accounts or deposits that can be easily withdrawn in the short term. This is a popular form of keeping cash.
- Short-term debt funds: investment funds focusing on short-term financial instruments and cash. They are relatively more stable than stocks or some bonds and allow investors to access funds quickly.
- Monetary assets: cash and its equivalent are the most liquid short-term financial assets and can be used in case of immediate financial need.
Short-term financial assets are intended to provide financial liquidity, therefore they cannot be exposed to excessive risks. Often, the investor’s goal for short-term assets is to maintain real value – that is, to fight inflation. Long-term financial assets, on the other hand, are investments from which we expect higher rates of return and accept higher risk.