Difference between Real and Financial assets
About this lesson
In this video, you will learn the differences between Real and Financial assets.
Real assets
Real assets are the things an economy uses to produce goods and services:
- Land and buildings
- Machines, equipment and technology
- The knowledge and skills of workers
They create the economy’s wealth. A country’s living standard depends on its real assets.
Financial assets
Financial assets are claims on real assets, or on the income they produce:
- Stocks (equities): ownership of part of a company and a share of its profits.
- Bonds (fixed income): a promise from a borrower to pay interest and repay the loan.
- Derivatives such as options and futures, whose value depends on other assets.
Financial assets don’t add to the economy’s productive capacity by themselves. They decide who owns the income that real assets produce.
How they connect
When a company sells new shares, investors get financial assets, and the company uses the money to buy real assets, such as a factory. The factory produces goods; the profits flow back to shareholders.
| Real assets | Financial assets | |
|---|---|---|
| What they are | Land, buildings, machines, skills | Stocks, bonds, derivatives |
| Role | Produce goods and services | Claims on the income of real assets |
| On a household balance sheet | Mostly the home | Bank deposits, retirement accounts, shares |
Note: For the economy as a whole, financial assets and liabilities cancel out. One person’s bond is another’s debt, so national wealth is made of real assets.
Next: the investment process.