Question

How does the valuing of a real asset (such as a building) differ from the process of valuing a financial asset (such as a stock or bond)? Integrate Bible passages into the discussion that addresses the Christian worldview.

Answer 1

Financial assets are tangible assets that you can quickly convert into cash. Stocks, bonds, cash reserves, bank deposits, trade receivables, notes receivable and shares are all common examples of financial assets. These are tangible or liquid assets that actually represent claims on the underlying value of the other types of assets such as real estate and properties. The main characteristic of a financial asset is that it has some type of monetary value, but that value is not tangible until it’s exchanged for cash. Financial assets also have classifications such as equities and fixed income securities. Equities are shareholding rights to a business, and they are issued either as common shares or preferred stock. Unlike preferred stock, common shares carry voting rights. Fixed income securities are instruments of borrowing that earn fixed rates of interest over a specified duration. Public institutions issue some types of fixed income securities, while others are issued by private entities. Examples include treasury, municipal and corporate bonds.

The real assets definition refers to value-generating physical assets that your business owns. Common examples include land, buildings, inventory, precious metals, commodities, real estate, land and machinery. These physical assets are important for your business because they carry some type of intrinsic value. Intrinsic value is defined as the exact value of an asset as determined by factors such as location, function and acquisition costs.

Real investments are not as liquid as financial investments, which means you can’t convert real assets into cash as quickly as you could convert financial assets into cash. Another difference between real investment and financial investment is that real investments – such as owning a building – can be less valuable over time, whereas cash flows generated by financial assets experience constant growth. For example, the valuation of a building your business owns can decrease over time due to depreciation. That’s typically not the case with financial assets such as cash reserves, stocks and bonds. Although these assets can lessen in value over time, that decrease is often much less than that of a real asset.