What Is the Difference Between Financial and Real Assets?
The main difference between financial and real assets is that financial assets are cash and securities, such as stocks and bonds, whereas real assets represent tangible possessions, such as real estate, production equipment and inventory. Generally, financial assets are more liquid than real assets because they can be readily converted to cash. Real assets take considerably more time to sell.
Businesses are evaluated according to the assessment of both financial and real assets and the ability of each to generate cash flow. Financial assets usually show continued growth and increased value, but the building and vehicle components of the real assets lose value over time. Real estate is a stable real asset that generally appreciates over time and adds value to the business portfolio.
Businesses require both financial and real assets to continue to deliver their products and meet the financial obligations that enable them to remain in operation. Financial assets generate the income to purchase real assets, and in turn, real assets are used to produce goods and services to generate revenue. A diversified portfolio with a balance of financial and real assets creates a strong company that is able to weather the ups and downs of the financial market.