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Types of Financial Assets: Money, Stocks & Bonds

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  • 0:01 Financial Assets:…
  • 1:02 Money
  • 2:05 Stock
  • 4:17 Bonds
  • 5:16 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

For an economy to operate effectively, consumers and businesses need a common medium of exchange and mechanisms to encourage some people to save, others to borrow and others to invest. In any modern economy, these needs are met with money, stocks and bonds.

Financial Assets: Money, Stocks and Bonds

Before we discuss different types of financial assets, let's make sure we understand what we mean when we say financial asset. To qualify as a financial asset, three important conditions must be met. It must be:

  1. Something you can own
  2. Something of monetary value
  3. That monetary value is derived from a contractual claim

That last condition may be hard to grasp, but it'll be clear in a few minutes.

So, financial assets are different than physical assets, like land or gold. With land and gold, you can touch and feel the actual physical asset, but with financial assets, you can only touch and feel something (usually a piece of paper) that represents the asset of value. The three financial assets we will discuss in this lesson are money, stocks and bonds.

Money

Money is an official medium of exchange consisting of cash and coin defined by a government. Money, currency, cash, legal tender - they all mean the same thing. They are all a symbol of a central bank's commitment to sustain, as best they can, that money's value. Money is a financial asset because the value of the asset itself doesn't come from the paper or metal it is printed on; it comes from the faith and credit of the government that issued that money.

Money is obviously an important financial asset. Without a common medium of exchange, we would all need to barter with one another, trading whatever goods and services we have for something else we need, or trade what we have for something else we could then trade again with someone else who has what we need. Imagine how complicated that can get! As of March 2014, there was about $1.26 trillion of U.S. money in circulation, according to the Federal Reserve.

Stock

Another important financial asset in the U.S. economy is stock. Like money, stock is just a piece of paper that represents something of value. That 'something of value' represented by stock is an ownership stake in a business. Stock is also referred to as 'equity' because when you own stock in a company, you have equity in that company's profit.

For the simplest of examples, let's imagine little Jane's lemonade stand. Jane has $4 to start her business, but she needs $10. Jane's parents give her $3 in exchange for 30% of her business, her friend gives her $1 for 10% of her business and her brother gives her $2 for 20%. Now Jane, her parents, her friend and her brother all have stock in her business.

As simple as that example is, it describes stock. Now, the complexities come in when we try and put a value on that stock. The value of a share of stock depends on many factors. One share of stock in one company is not the same as one share of stock in another company. The number of shares each company has issued will impact the value of your share, as will the size and profitability of each company. Anything that may impact a business - good or bad - will change the value of stock.

Those are just very basic, fundamental factors that can impact the value of a share of stock. Macroeconomic trends impact individual stock prices, as well. Thousands of books have been written trying to figure out the golden rule that determines exactly what a share of stock is worth.

The value of stock can vary, minute to minute - even second to second. If you calculate the total value of all stock listed on the two largest stock exchanges in the world - the New York Stock Exchange and NASDAQ (both located in the United States) - the market capitalization is over $30 trillion, as of February 2014.

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