What Is a Real Asset?
Let me explain what a real asset is. It's a physical asset, something you can actually touch and manipulate. Its value comes directly from its physical properties. Think of examples like real estate, precious metals, land, and equipment. On the flip side, intangible assets are things you can't hold or see, but they're valuable too, such as trademarks, patents, goodwill, and brands.
Key Takeaways
Here's what you need to remember: A real asset is a physical one that you can hold and manipulate. Its value is connected to its physical properties. Intangible assets, which you can't hold, are the opposite of real assets.
Understanding Real Assets
Assets come in categories: real, financial, or intangible. All of them provide economic value to a company or person. If something has value that can be exchanged for cash, it's an asset. Intangible assets are non-physical, like patents, copyrights, brand recognition, trademarks, and intellectual property. For a business, a strong brand identity might be the most crucial intangible asset.
Financial assets are liquid and get their value from contractual rights or ownership claims. Examples include stocks, bonds, mutual funds, bank deposits, investment accounts, and cash. They might have a physical form, like a dollar bill, or be nonphysical, like a mutual fund.
In contrast, a real asset has a tangible form, and its value comes from its physical qualities. It could be natural, like gold or oil, or man-made, like machinery or buildings.
Special Considerations
Sometimes financial and real assets are both called tangible assets. For taxes, the IRS treats intangible assets differently from tangible ones, but it groups real and financial assets together as tangible. Most businesses have a mix of these: real assets like cars, factories, and equipment; intangible ones like trademarks and copyrights; and financial ones like shares in other companies.
Real Assets vs. Financial Assets
Even though they're both tangible, real assets are a distinct class from financial assets. Real assets have intrinsic value, while financial assets get value from a claim on an underlying asset, which could be real or intangible. For instance, commodities and property are real assets, but futures, ETFs, and REITs are financial assets based on those real ones.
This overlap can cause confusion. ETFs might invest in companies dealing with real assets or track their prices directly. Physically backed ETFs, like those for gold or silver, are financial assets, but the actual metal they hold is the real asset.
Advantages and Disadvantages of Real Assets
Real assets are generally more stable than financial ones. Factors like inflation, currency changes, and other economic shifts affect them less. They're a good choice during inflationary periods because they often outperform financial assets then.
Pros and Cons
- Pros: Portfolio diversification, Inflation hedge, Income stream
- Cons: Illiquidity, Storage fees, transport costs
What Are the Three Types of Assets?
Assets fall into real, financial, or intangible categories, all representing value exchangeable for cash.
What Is a Tangible Asset?
Tangible assets include financial and real assets, as opposed to intangible ones.
Why Is It Good to Have Real Assets?
Real assets offer more stability through inflation, currency fluctuations, and other macroeconomic changes compared to financial assets.
The Bottom Line
To wrap this up, assets are real, financial, or intangible. Real assets are physical with intrinsic worth from their substance and properties. Intangible assets are non-physical but valuable, like patents. Financial assets are liquid, deriving value from claims, and can be physical or not, like stocks or cash.
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