After getting a clear idea about what financial assets are, let us now look at some of its characteristics from an investor's (supplier of capital) point of view. First, they allow individual investors to spread their consumption pattern. Every individual goes through periods of excess income (young/middle age) as well as deficit income (retirement/old age) during his/her life. Financial assets help individuals to save/invest during the excess income periods, so that they can meet their consumption needs during periods of deficit income. Thus financial assets allow investors to spread their consumption.
Second, the financial assets allow individuals to derive income from real assets and allocate the risk. An individual investor can not invest directly in productive real assets for two reasons: (a) it requires huge capital and (b) it involves huge risks. For example, as an individual I may not start manufacturing steel, automobiles or even start a retail chain. But with the help of financial assets, it is possible for me to invest in the businesses engaged in the above activities and enjoy the profits. Further they allow me to allocate the risk, even if I have limited amount to invest. So, if I am holding the shares/bonds of five different companies, it is as good as me getting engaged in five different businesses simultaneously. Again, I can choose to allocate my risks through a combination of high risk instruments like equity and low risk instruments like bonds.
A third characteristic of financial assets is that they allow separation of ownership from management. When you have large number of individuals contributing capital to a business, it is practically not possible to involve all of them in the day-to-day management. Moreover, managers need to be professionally qualified and trained. So, financial assets allow for sourcing capital from various individuals spread all over the country (or the world); whereas the management of the business vests with the professional managers. They also allow transfer of ownership without any impact on the management of the business.
Second, the financial assets allow individuals to derive income from real assets and allocate the risk. An individual investor can not invest directly in productive real assets for two reasons: (a) it requires huge capital and (b) it involves huge risks. For example, as an individual I may not start manufacturing steel, automobiles or even start a retail chain. But with the help of financial assets, it is possible for me to invest in the businesses engaged in the above activities and enjoy the profits. Further they allow me to allocate the risk, even if I have limited amount to invest. So, if I am holding the shares/bonds of five different companies, it is as good as me getting engaged in five different businesses simultaneously. Again, I can choose to allocate my risks through a combination of high risk instruments like equity and low risk instruments like bonds.
A third characteristic of financial assets is that they allow separation of ownership from management. When you have large number of individuals contributing capital to a business, it is practically not possible to involve all of them in the day-to-day management. Moreover, managers need to be professionally qualified and trained. So, financial assets allow for sourcing capital from various individuals spread all over the country (or the world); whereas the management of the business vests with the professional managers. They also allow transfer of ownership without any impact on the management of the business.
No comments:
Post a Comment