Real vs Financial Assets: What’s the Difference?

Imagine you’re thinking about building a lemonade stand. To actually get started, you’d need some physical things, right? You’d need wood to build the stand, lemons and sugar to make the lemonade, cups to serve it in, and maybe even a pitcher and a sign. These are all real things you can touch and use to make money. In the world of finance, we call these kinds of things “real assets.”

Real assets are essentially tangible items that have intrinsic value because of their physical properties and their ability to generate future income or provide services. Think about land. Land is a real asset. You can build on it, farm it, or extract resources from it. Consider machinery in a factory. That machinery is a real asset because it’s used to produce goods that can be sold for profit. Oil in the ground is a real asset because it can be extracted, refined, and used as fuel or in other products. Even gold and silver are real assets because they are physical commodities with inherent value and various industrial and investment uses. The key characteristic of a real asset is that its value comes from its physical nature and what you can do with it directly.

Now, let’s say your lemonade stand becomes really successful, and you decide you want to expand and open more stands. You might need to borrow money or bring in investors. To do this, you might issue shares in your lemonade stand business. These shares, or stocks, are not real assets. You can’t touch or use a share certificate to make lemonade. Instead, a share represents a claim on a portion of the ownership of your lemonade stand business, which does own real assets like the stands themselves, the equipment, and the inventory.

These shares are examples of “financial assets.” Financial assets are intangible claims on real assets or the income generated by them. They derive their value from a contractual right or claim, not from their own physical substance. Think of a bond. When you buy a bond, you are essentially lending money to a company or a government. The bond itself is just a piece of paper or an electronic record, a financial asset. Its value comes from the promise that the borrower will repay the principal amount plus interest. The borrower might use that money to invest in real assets, like building a new factory, but the bond itself is a financial asset, a claim on the future cash flows of that factory or the government’s revenue.

Another example is a bank deposit. The money in your bank account is a financial asset. It’s not physical cash sitting in a vault somewhere with your name on it. Instead, it’s a claim against the bank. The bank, in turn, uses those deposits to make loans, often to businesses to invest in real assets. So, your bank deposit is a financial asset that indirectly links you to the real economy.

Therefore, the fundamental difference is this: real assets are tangible things that have intrinsic value because of their physical properties and ability to produce goods or services. Financial assets are intangible claims or rights to future cash flows or value that are derived from real assets or economic activity. Financial assets essentially represent ownership of, or a claim against, real assets. They facilitate the flow of capital in the economy, allowing individuals and institutions to invest in and benefit from the productivity of real assets without directly owning or managing them. Think of it like this: real assets are the ingredients and tools to bake a cake, while financial assets are the recipes, the contracts to sell the cake, or the shares in the bakery company. Both are important, but they play distinct roles in the economic picture.