In wholesale terms, an asset is any productive element owned by a group or an individual.
An asset can be $100 in a 16-year-old's bank account. It can be a star quarterback in the National Football League. Or, in more personal terms, an asset can be a best friend or a wonderful spouse - someone who makes life better (in fact, that may be the best example of an asset.)
But on Wall Street, where cash is king, an asset has a similar, but more unique meaning - and that's the definition of an asset that counts to individual investors, corporations, portfolio managers, government officials, and accountants, among other strains of wildlife on the financial landscape.
In economic terms, anything that is owned, and has value, is an asset.
For example, a money-making stock is an asset to an investor, and even a money-losing stock has the potential to be an asset - it just has to flip the switch and start climbing upward in value.
In corporate finance circles, an asset can be an item of value on a company's balance sheet, like a manufacturing plant that generates income, or a fleet of vehicles that transports managers and staffers to client sites, thereby contributing to the bottom line.
The Primary Types of Financial Assets
It's not enough to recognize an asset as a valuable entity for an individual, company or corporation. You have to know how to categorize them, too.
For Main Street Americans, any item of financial value represents an asset, including:
1. A Home
By and large, home values appreciate, making them one of a homeowner's most valuable asset.
2. Commercial Property
Many individual real estate investors invest in commercial property, like standalone buildings and office complexes. Those, too, represent a high asset value.
3. Bank Accounts
A bank checking or savings account, or a certificate of deposit or money market account holds financial assets in cash and savings.
A car, truck or SUV is a high-value asset, although the value of a new vehicle depreciates in value right after the owner drives it off the dealership lot. Thus, the real asset value in a vehicle occurs when it's paid off. An experienced classic car collector can do better by buying valuable autos at a discount, then holding them as an asset as its price value appreciates over time.
5. Investment Portfolios
Stocks, bonds, funds and retirement accounts (like a 401 (k) plan) hold valuable assets in the form of financial securities owned by the investor. While financial market prices can certainly decline, investment securities are considered highly valuable as an asset, as they usually appreciate in value and can be easily sold in the public financial markets.
6. Gold, Coins and Commodities
Assets like gold, silver and other commodities can be purchased directly (like gold bars) or as stocks and funds. Prices are highly volatile, but given the high demand for commodities, they can offer a high level of value to disciplined and experienced investors.
7. Life Insurance Policies
Insurance policies, especially life insurance policies, hold a high asset value, too. When the recipient dies, the beneficiaries take the assets built up in the policy over a long period of time, and accept them in the form of a direct cash payment, giving them additional assets at their disposal. Or, if you have a long-term care insurance policy, you can use the assets put into the account and that have accrued over the years to pay for health care costs well into retirement. That's a valuable asset for any retiree.
8. Retirement, Annuities and Pension Plans
After your working years, you may be collecting a regular check (or a one-time balloon payment) from a retirement account, annuity or pension plan. Or, you have a retirement asset in the form of Social Security payments. Either way, if you're getting paid in retirement, that's an asset.
Figuring Out Your Total Household Financial Assets
There's a good way to calculate the total value of your current assets and establish your net worth.
The formula works like this - total all of your household assets, using the list above. If you're not sure about the value of a major item, like a house or a vehicle, use a ballpark figure based on current neighborhood home values for your house, and Kelly Blue Book values for your current car, truck or SUV.
Then, establish your household financial liabilities, i.e. money you owe on things like mortgages, student loans, auto loans, credit cards, back taxes, and other debts. Subtract your liabilities from your assets and the number you have left is your current net worth.
What Are Business Assets?
Companies have assets, too, although they're treated differently than individual or household assets.
For corporations, in particular, knowing what to do with an asset, and how to categorize it, is essential in maximizing the value of any asset. That process starts by establishing the main asset models.
First, know that business assets are listed on a company's balance sheet, recording a firm's assets against their financial liabilities. The balance sheet also demonstrates whether or not a company's assets were derived from debt or by issuing equity. In general, the balance sheet shows how well (or how poorly) a company is performing financially.
On that balance sheet, two types of company assets are recorded:
1. Current Assets
This corporate asset model shows assets that may be converted into cash within a specified period of time, like one year, one quarter or within another predetermined cycle. Companies rely on current assets to pay their bills, investment money, and generally run their operations on a regular basis.
Examples of current assets include cash and cash equivalents, such as bank certificates of deposit, Treasury bills and other shorter-term investment vehicles. Current assets can also include investment securities, stocks, and funds, as well as accounts receivable and inventory.
2. Fixed Assets
These "tangible" assets are longer in term, reflecting a company's investment in itself, by doing things like buying land, erecting buildings and plants, purchasing equipment, and investing in staff. If a company purchases a fleet of trucks to deliver its goods across the country, those trucks are considered to be fixed assets, as they are likely to be owned by the company for a long time.
In general, it's easier for companies to liquidate current assets than it is to use tangible assets to convert assets to cash. After all, it's easier to sell a stock or a bond than it is to sell a fleet of trucks - if that is, you need the cash within a short-term period.
The Takeaway on Assets
Whether the asset is owned by an individual or by a company, you can best categorize that asset as being in one of three categories - ownership, value-based, or as a resource.
- Ownership as an asset. Ownership of an asset provides that owner with some much-needed flexibility, as the asset can be converted to cash, or to a cash equivalent.
- Financial value of an asset. All assets have at least some financial value, meaning those assets have an assigned market value that someone might want to own. The vehicles for exchanging assets are direct cash sales, non-cash asset trades, and other forms of financial exchange.
- Asset as a resource. Taking a longer-term view, assets can be held, so they can accrue in value, which makes them even more financially viable in the future.
Once you look at an asset that has value, can grow in value, and can be sold or traded for other valuable assets, you're getting the real-world picture on why assets are a linchpin of basic economics.
That's the case if you're a 16-year-old boy with a $100 checking account or a Fortune 500 company with billions of assets on the line.
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