Financial Assets

A financial asset/instrument/security is a claim against another economic unit and is held as a store of value arid for the return that is expected. While the value of a tangible/physical is depends on its physical properties such as buildings, machines, furniture, vehicles and so on, financial,asset represents a claim to future cash flows in the form of interest, dividend, and so on. They are a claim or a stream of income and/or particular assets. The entity/economic unit that offers the future cash flows is the issuer of the financial instrument and the owner of the security is the investor, Depending upon the nature of claim/return, an instrument may he (i) debt (security) such as bonds, debentures, loans, (ii) equity (security) shares and (iii) hybrid security such as preference shares and convertibles. Based on the type of issuer, the security may be (1) direct (2) indirect and (3) derivative. The securities issued by manufacturing companies are direct assets (e.g. shares/debentures). Indirect assets are claims against financial intermediaries (e,g, units of mutual funds). The derivative instruments include options and futures. The prevalence of a variety of securities to suit the investment requirements of heterogeneous investors offers differentiated investment choice to them and is an important element in the maturity and sophistication of the financial system.

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