Types of Financial Assets
Majority of financial assets used worldwide are in the form of deposits, stocks and debt.
Deposits can be made either with banking or non-banking firms. In return, the lender will receive a certificate in case of a fixed deposit and a checking account in case of a savings/current deposit. These serve as payment mechanism to the supplier of funds. Interest will be earned on such deposits.
When financial assets are in the form of stock, they represent ownership of the issuing company. Due to this right to ownership, the holder of the stocks will have a share in the firms' profits.
Unlike the stocks, financial assets in the form of debt raise an obligation on the borrower to repay the amount borrowed. The debt instrument will be a contract entered into by the borrower of funds with the lender of funds, to repay the amount borrowed after a predetermined period and at a certain rate of interest. If there is an asset serving as a collateral to the borrowing, then the holder of the debt instrument will have a priority claim on the asset.
Within this broad classification, financial innovations have brought about a variety of instruments. In stocks, there are preferred stocks and common stocks, with the latter having voting rights. In case of debt instruments, the classifications are much more varied depending on the issuer of securities and other terms and conditions present in the contract. For example, gilt-edged securities are the debt instruments issued by the government. Other classifications of the debt instruments are made as follows: fixed/floating rate bonds, negotiable/non-negotiable instruments, redeemable/irredeemable bonds, convertible/non-convertible debentures etc. Further, these instruments, both stock and debt, enable the issuer to raise funds in domestic as well as foreign currencies.