Understanding Financial Assets and Markets: A Comprehensive Guide
Characteristics of Financial Assets
- Liquidity: This refers to the ease with which a financial asset can be converted into cash. Liquidity is provided by the financial market where assets are traded.
- Profitability: This is the ability to generate returns. The profitability of financial systems can be seen through the receipt of dividends or through capital gains on fixed-income assets. The yield will be obtained through interest.
- Risk: This refers to the creditworthiness of the issuer of the financial assets to meet all its obligations. The greater the risk assumed with a financial asset, the higher the expected profitability. Risk is measured by volatility, which is influenced by the economic situation both nationally and globally.
Types of Financial Markets
According to Negotiation Phases
- Primary Markets: These are markets where new financial instruments are first issued and sold, often between large companies and institutional investors.
- Secondary Market: This is the market where financial assets that were issued and sold in primary markets are resold to the general public. This sets the final price of the asset. It serves two functions:
- Making financial assets liquid
- Establishing the final price of the assets
By the Time of the Transaction
- Auction Markets or Regulated Markets: These are markets where buyers and sellers meet in one central place to conduct their transactions. They are characterized by a system called “open outcry” held in stock exchanges, through direct talks where the rule of “best bid” applies and transactions are made through a broker or brokerage company.
- Over-the-Counter (OTC) Markets: These are markets where agents operate without a physical trading floor. They are located in different places and transactions are conducted electronically or over the phone.
For Assets Transferred
- Money Markets: These are markets where short-term, highly liquid assets with maturities generally less than one year are traded. These assets are considered close to cash.
- Capital Market: These are markets where financial assets with maturities of medium and long term are traded. They are fundamental to the achievement of certain investment processes. These markets sell assets with a maturity of over one year.
On Money Markets
Foreign Finance Law
- Constitutional Law: This defines the principles and general guidelines for developing laws of a financial nature. (Article 84-87 of the Constitution).
- International Law: Due to the globalization of the economy, trade, development of communication, the requirement of foreign investment, etc., international law plays a significant role in public and private finance.
- Tax Law: This aims to study the laws, rules, and principles governing the imposition of taxes.
- Administrative Law: This focuses on the subjects of public administration and the community, ensuring their needs are met.
- Criminal Law: This relates to the violation of financial laws and state control of private activity.
- Policy Commends: The economic factor takes precedence in financial matters, and the legal acts specific to financial activity are based on principles that belong to economic analysis.
Financial Market
A financial market is a place, device, or system that enables operators to exchange (buy and sell) financial assets. Financial assets act as intermediaries between those with available monetary resources and those who lack them, i.e., between supply and demand. They are developed by individuals, with the participation of the state to regulate these markets. It has two parts:
- Those who require financing
- Those who provide funding (bidders)
Financial Asset
A financial asset is a legal document that represents an investment or economic right for the person providing the money. It is a funding mechanism for those who issue it, in other words, those who are borrowing the money. They represent a liability for the issuer and an asset or right for the acquirer. Any transaction involving a financial asset, whether a purchase or sale, will involve two transfers:
- Fund Transfer: For example, between private investors and companies when they issue bonds.
- Risk Transfer: This is given depending on the type of financial asset being traded.
Among the major financial assets are: securitization of assets, bonds, and treasury bills.
Types of Financial Assets
- Tangible Assets: These are assets whose value depends on their physical characteristics. Examples include physical assets subject to use or consumption, such as urban property, movable and immovable property.
- Intangible Assets: These are non-physical assets whose value depends on their characteristics and provide a legal right to future benefits. Examples include trademarks, patents, and promissory notes.