One of the most common ways to explain financial assets is by comparing them to the physical assets that they represent. The difference between them is that liquid assets can be traded quickly in a market, while illiquid assets cannot be easily converted into cash. Examples of illiquid assets include real estate, fine antiques, and some stocks. These assets are often speculative investments with low volumes of trading, and they may not be able to find a buyer when the time comes to sell them.
Financial assets include stocks, bonds, money market accounts, and equity stakes. These assets have varying values until they are converted to cash, and their value fluctuates. While there is no intrinsic physical value to these assets, their value reflects the risk and supply in the market. By contrast, real assets derive their value from physical substances or properties, such as land, precious metals, and commodities.
Liquid assets provide a limited return on investment, which is the profit divided by the cost of ownership. Savings and checking accounts may earn modest interest, but they rarely earn appreciation. Certificates of deposit, which are also a form of financial asset, allow depositors to receive interest payments on their money for a specific period. These deposits can last anywhere from three months to five years. The most basic form of financial asset is cash. These accounts are easily convertible to cash and insured by the NCUA and FDIC up to $250,000.
In addition to equity investment gains and losses, financial assets are measured at fair value, and these amounts are recorded in the profit and loss statement. Whether a financial asset is traded at fair value or at cost depends on its measurement method. A business may measure it at amortized cost or at fair value through its profit and loss statements.