Definition
Real assets are tangible or physical assets owned by a company or an individual. They include items such as real estate, equipment, commodities, or any other physical assets that can be touched. Unlike financial assets like stocks or bonds, the value of real assets typically arises from their physical properties.
Key Takeaways
- Real Assets refer to physical or tangible assets that have intrinsic value due to their substance and properties. They include items like real estate, precious metals, commodities, natural resources, land, etc.
- Real Assets provide a hedge against the risk of inflation because their value tends to rise over time. They are generally less volatile than financial assets and can provide stable income and long-term growth to investors.
- Investing in real assets requires specialized knowledge and skills to evaluate and manage such investments effectively. They can be illiquid and come with associated costs such as maintenance, insurance and taxes.
Importance
Real Assets are crucial in finance as they represent tangible, physical assets such as property, machinery, or commodities that have inherent value due to their usability and exchangeability.
These assets often provide the backbone of a company’s operations and their investment value lies in their ability to generate income or appreciate over time.
Their importance is further heightened because they often act as a hedge against inflation, maintaining their value even when the economy is undergoing inflationary pressures.
Understanding the nature and value of real assets is therefore critical for accurate financial management, fruitful investment strategies, and comprehensive risk assessment.
Explanation
Real assets play a crucial role in the financial landscape, serving as the backbone of an economy as they contribute to the production of goods and services. These include physical assets like properties, infrastructure, commodities, land, equipment, and natural resources, all of which have intrinsic value due to their usability and major role in economic productivity.
They are often used in strategic financial planning and management, as they provide a hedge against inflation and contribute to portfolio diversification, giving an investor tangible resources even in the face of market fluctuations. Moreover, real assets are instrumental not just for the individual, but also in strengthening a country’s economic position.
Infrastructure, real estate, and natural resources, for example, all contribute significantly to a nation’s wealth and economic output. Additionally, these assets can be used as collateral for loans, thereby facilitating the flow of credit within the economy.
In essence, real assets, through their practical and economic usability, play an invaluable part in asset and wealth management, economic growth, and financial stability.
Examples of Real Assets
Real Estate Property: This is one of the most common examples of a real asset. Houses, commercial property, apartments, and other types of real estate are tangible assets that provide value to the owner. They can produce income through rent, and might also appreciate in value over time.
Gold: Gold is a valuable physical asset that can be bought or sold. Gold has been used as a form of wealth for thousands of years due to its durability, rarity, and the fact that it can’t be artificially created. Gold’s price might fluctuate in response to economic conditions, but it typically maintains value over long periods of time.
Machinery & Equipment: For businesses, real assets can also include machinery and equipment. For example, a company in the manufacturing industry may have significant investments in machinery, while a restaurant owner may have invested in kitchen equipment. These are assets that are integral to the running of the business, and are not merely investments to be bought or sold for profit. They provide a direct use to the company and help generate income.
FAQs about Real Assets
1. What are Real Assets?
Real assets are physical or tangible assets that have value due to their substance and properties. They include precious metals, commodities, real estate, agricultural land, machinery and oil.
2. How are Real Assets Valued?
Real assets are usually valued based on their physical traits and the demand and supply in the market. The cost to reproduce or replace the asset can also be a factor in its valuation.
3. What is the difference between Real Assets and Financial Assets?
Real assets are physical or tangible assets, such as real estate or machinery, whereas financial assets are intangible assets like stocks, bonds, or cash.
4. What are the benefits of investing in Real Assets?
Investing in real assets can provide portfolio diversification, inflation protection and potential to earn returns. They can also be a good option for long term investments.
5. What are the risks associated with investing in Real Assets?
Risks associated with investing in real assets can include economic downturns, natural disasters, changes in market demand, and the lack of liquidity compared with other types of investments.
6. Are Real Assets liquid?
Most real assets are not as liquid as financial assets. This means they can be harder to buy and sell quickly. The level of liquidity can greatly depend on the type of real asset in question.
Related Entrepreneurship Terms
- Physical Assets
- Tangible Assets
- Capital Investments
- Real Estate
- Natural Resources
