Difference between real assets and financial assets

Real Assets

Real assets are those assets which have physical existence and can be seen and hold. Gold, land & building, inventory, plant and machinery etc. are some of the example of real assets. For example, if you purchase gold then its ownership is transferred to you from the seller and you a right to hold or sell it. In order to establish any business, the business organization has to make huge investment in real assets such as land and building, plant and machinery, inventories, human resources etc. which is termed as real investment. The investment in real assets leads to the investment in financial assets. To buy these real assets the company have to collect adequate capital and for that the company issues shares or bonds. Here if any investor invest money in shares or bonds then it will be the financial investment for the investors in financial assets. Some of the example of real assets are:

• Gold
• Plant & Machinery
• Land & Buildings
• Inventory
• Human resource
• Goodwill etc.

Read also: Real and Financial Investment

Financial Assets

Financial assets are those assets which do not have physical existence. When we purchase financial assets we only get a paper of financial claim as a certificate of that assets which is viewed as financial assets. So, it is also known as paper assets. Although the certificate of claim is viewed as financial assets they are invisible in nature. Financial assets also can be defined as a claim to the income generated by the real assets.  Some of the example of financial assets are pointed out below:

• Equity Shares
• Preference shares
• Corporate Bonds
• Debentures
• Treasury bills
• Commercial papers
• Certificate of fixed deposit etc.

Read also: Why people make investment?

Difference between real assets and financial assets

Some of the main difference between real and financial assets are given in the box below:

Basis of Difference	Real Assets	Financial Assets
Productivity	Real assets have productive capability which are used to produce goods and services.	On the other hand, the financial assets do not have productive capability.
Position on balance sheet	Real assets are always shown in the assets side of balance sheet.	Financial assets are posted both in assets and liabilities sides of the balance sheet. For example, the financial securities (such as bond, debentures, shares etc.) issued by the company are shown in liabilities side of the balance sheet and the securities purchased by the company are shown in assets side.
Divisibility	All real assets cannot be divisible. For example, some of the assets like machinery, buildings etc. are not divisible. On the other hand, other real assets like gold, land etc. can be divided into small units and can also be bought and sold.	Financial assets can be divided in to a small unit. If you want to buy or sell some part, then it is possible in financial assets. For example, suppose XYZ Company is issuing 10000 equity shares. If you want to invest in equity shares than you can purchase any number of shares.
Liquidity	Real assets cannot be sold easily. If you want to sell real assets then at first you have to search customers for it. Customers look your assets and if they like then buy. So, it takes long time to convert into cash.	Financial assets are highly liquid in nature. You can sell it whenever you want.
Convertibility	A form of real assets cannot be converted in to another form. For example, you cannot convert machinery into a land. You have to sell the machinery so as to purchase land.	On the other hand, financial assets have converting capability. You can convert a form of financial assets to another form. For example, if you have 1000 bonds of ABC Company, then you may have option to convert it into preference stock or equity shares. And if you have some preference shares then you can convert it into equity shares.
Holding period	Frequent purchase and replacement of real assets are not possible due to the high amount of costs. So, the holding period of real assets is very long. For example, once you purchased a machinery, you will not replace it until it works perfectly. Because it causes high installation costs.	Generally, the holding period of financial assets are short. You can buy and sell it whenever you want. And its transaction cost is also low.
Information Availability	It is difficult to collect the information if you want to buy the real assets. For example, if you want to buy a machinery, it will be difficult for you to collect information regarding the prices, suppliers, specifications and so on.	The information related to financial assets are readily available. For example, if you want to buy a share of any company then all the information related to it are easily available.