This is “Types of Financial and Other Traded Assets”, section 8.4 from the book Finance for Managers (v. 0.1). For details on it (including licensing), click here.

For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (2 MB) or just this chapter (72 KB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).

Has this book helped you? Consider passing it on:
Creative Commons supports free culture from music to education. Their licenses helped make this book available to you.
DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators.

8.4 Types of Financial and Other Traded Assets

PLEASE NOTE: This book is currently in draft form; material is not final.

Learning Objectives

  1. Describe commonly traded assets.
  2. Explain the concepts of liquidity and fungibility.

Almost anything we can imagine is traded somewhere (although not always legally!), and one aim of markets is to increase the liquidity of assetsThe ease at arranging a trade between a buyer and a seller of an asset., or their ease at arranging a trade between a buyer and a seller. Certain assets are easier to trade or value than others, due to government regulation, ease of transfer or storage, fungibilityThe ability to substitue one instance of the asset for another. Gasoline is very fungible, since any one gallon is very like another, whereas a unique work of art is not fungible. of assets (the ability to substitue one instance of the asset for another), or a myriad of other factors. We will now discuss the most common types of traded assets.

CommoditiesAgriculture products (like wheat, corn, pork bellies, or coffee), metals (like gold, silver, or iron), energy products (like oil or electricity), or a host of other highly fungible physical products. include agriculture products (like wheat, corn, pork bellies, or coffee), metals (like gold, silver, or iron), energy products (like oil or electricity), or a host of other highly fungible physical products. Some of the earliest exchanges focused on commodities, as farmers and other producers of goods sought corresponding buyers.

Currency trading has become more significant since the largest economies removed tying their currencies directly to the value of precious metals. Given the high level of liquidity in most currencies (government regulated currencies being the chief exception), these markets are very competitive and active 24 hours a day.

Real estateLand the fixed developments upon it., which includes land the fixed developments upon it, is in contrast much less liquid than previously discussed assets. As such, transactions tend not to occur in organized markets, but are handled by localized agents arranging specific transactions. Nonetheless, the value in this market is significant; for homeowners, real estate is typically the largest capital investment.

Alternative investmentsArt, antiques, wine, and collectibles (like rare baseball cards) are extremely illiquid and hard to value. like art, antiques, wine, and collectibles (like rare baseball cards) are extremely illiquid and hard to value. There are auction houses that specialize in pricing and trading these items, but the market is relatively small compared to other assets.

In addition to these physical assets, which derive most of their value from what they are, and currencies, which have purchasing power backed by their respective governments, there exist financial assets, whose value derives from some sort of contractual agreement involving future transfers of wealth. The three main categories of financial assets are debt instruments, equity, and derivatives. Many financial assets have contracts written so that the owner of the instrument has the ability to transfer the benefits (that is, sell it) to another, in which case we call the asset a securityFinancial assets with contracts written so that the owner of the instrument has the ability to transfer the benefits (that is, sell it) to another..

BondsSecuritized loans. and debt instruments (for example, certificates of deposit) are securitized loans, principally traded over the counter (OTC). While some government issues (especially US treasuries) can be liquid, the majority of this market has a lower liquidity. Many loans, however, are not securitized, and typically remain between the bank and the borrower until they are fulfilled.

Equity includes shares of stockSecuritized ownership in a corporation., securitized ownership in a corporation, which can range in liquidity depending upon the size of the company, where it is registered, and many other factors. Many shares are traded in exchanges, either physically located (like the NYSE) or electronically (like the NASDAQ). Smaller companies can be traded in the distributed OTC markets. Private equityInvestments in non-public companies. (investments in non-public companies) is also an asset, though it tends to be very illiquid (some contracts barring investors from withdrawing funds for over a decade!).

DerivativesAny financial assets which primarily derive their value from any other asset. include any financial assets which primarily derive their value from any other asset. For example, stock options can give the purchaser the ability to buy or sell shares of stock, and futures contracts can guarantee a price for a transaction of a commodity to occur at a future date. Most derivatives are illiquid, although some products are specifically designed to take illiquid assets (like mortgages) and make them easier to trade. Derivative contracts have been prominently featured in some of the most spectacular losses by traders, as they often have complex risks associated with their trading.

Key Takeaways

  • Many different assets are traded, and each has different features and risks.
  • One goal of markets is to increase the liquidity of assets.

Exercises

  1. If the liquidity of an asset increases, does that benefit the buyer or seller of the asset?
  2. How are financial assets different from other traded assets?