An asset is anything that can be used to produce value or wealth. It may be a physical object, such as a factory, piece of land, or natural resource; it may be a financial asset, such as a stock, bond, or bank account; or it may be an intangible asset, such as a copyright, patent, or brand name. Assets are important because they can be used to generate income or finance other investments.
When you’re thinking about your personal finances, your house, savings account, and stocks are all assets. If you own a business, inventory, equipment, and accounts receivable are all assets. And if you’re looking to finance a new venture, the equity in your home or the cash value of your life insurance policy can be used as collateral for a loan.
In finance, the term “asset” is often used interchangeably with “investment.” That’s because when you buy an asset, you’re investing in something that has the potential to generate income or appreciate in value over time. Of course, not all assets are created equal—some are much riskier than others. So before you invest, it’s important to understand the different types of assets and how they work.
Stocks, bonds, and cash are the three most common types of assets. Each has its own characteristics and risks.
Stocks are ownership interests in publicly traded companies. When you buy a stock, you become a shareholder— meaning you own a piece of the company. As a shareholder, you’re entitled to a share of the company’s profits (in the form of dividends) and a vote on certain corporate matters. However, you’re also exposed to the risk that the value of your shares may go down if the company doesn’t perform well.
Bonds are debt instruments issued by corporations and governments. When you buy a bond, you’re lending money to the issuer in exchange for interest payments over time. Bonds tend to be less risky than stocks, but there is still some risk that the issuer will default on its payments.
Cash is simply money in the form of currency or deposits in a checking or savings account. Cash is the least risky asset class, but it also offers the lowest return.