Finance assets are another type of tangible assets and tend to be the smallest position on a balance sheet depending on the companys strategy. These assets are investments made by a firm such as stocks, corporate bonds, bank deposits and other financial assets. Unlike fixed asset such as land, property or plant financial asset do not mandatorily have a physical value. Rather financial assets tend to fluctuate in their value. This is very common when holding stocks. As we know the price of stocks is depending on the willingness of investors to either buy or a sell a stock to a certain price. Thus, the price of any stocks will change daily.
Furthermore, the financial assets are worthless until they are turned into cash usually by selling the asset such as stock or commodities. They are not really worthless but they only represent a fictitious price when just holding them.
Another type of financial assets is hard currency or cash that is hold very liquid. In this case a company is able to act very fast when holding money in saving and bank accounts for paying off short term investments or costs occurred for repair or maintanence. On the other side by holding too much cash in saving accounts the return on investment will be smaller because they money cannot work for the company properly. In times with very low interest rates and even negative interest rates the company might be in a situation to loose money when not investing it. (* This is what the central banks try to achieve. With very low or negative interest rates on saving and bank accounts they force companies to invest their money or they will lose money because they have to pay for saving their money.)
When investing in stocks or bonds as a financial asset a company tends to gain a higher return on their investment. On the other side the company is bearing the risks of economic turbulences and might sell their financial assets to a lower price as they bought it in a situation when they depend on the invested money. If the firm invested too much in financial asset such as stocks or bonds the risk of reducing the return on investment is arising. Selling bonds before maturity date reduces the yield and selling stocks at an inappropriate point can lead to a high loss on investment. For this reasons investors needs to watch company’s financial assets very closely in order to understand their strategy.
