Question

As you know, stocks and bonds are "pieces" of paper called "financial" asset as opposed to "real" asset such as a piece of land or a building or a car. What gives these "pieces" of paper their value? For example, Google shares cost $1,193 per share currently. Why do investors pay such a high price for the piece of paper sold by Google?

Answer 1

We all know that stocks and bond are financial assets and unlike real assets like land or building, financial assets are just a sheet of paper or maybe just a computer entry. But these financial assets like bonds or stocks issued by a company gives the holder the claim on the income generated by the company's real assets and financial assets are a great means of investment and they also generate higher returns. for example, we cannot own a power plant which is a real asset but we can buy a share of a power plant firm (which is a financial asset) and hence can share the income generated by the power plant firm.

By owning stocks of a firm, the investor is entitled to the dividend and a future higher return. Bondholders are entitled to periodically interest payment and the payment of the face value of the bond on maturity. Thus, Financial assets are a means of borrowing funds for the company from the investors and in return, the company promises to pay the holder a higher future return.

For company's like Google, investors are willing to pay a high price for its stock because the company promises to pay the investors a higher return in the future. While these papers (financial assets) carry significant risks, they also generate a higher return as per (Risk-return Trade-off Theory).