As we have discussed earlier, financial products are mainly classified in two categories 1) Financial Assets and 2) Non-financial Assets.
Further to this classification, there are multiple products in both categories. Let’s understand all of them.
Financial assets include cash, stocks, bonds, insurance policies, fixed deposits, mutual funds and more. Let’s understand these one by one.
As the very name suggest, it’s the cash we have in hand or in our savings bank account. It is one of the most liquid assets across all categories. In financial planning, liquidity of a product refers to its ability to get converted in cash. We will discuss liquidity at length later. Cash-in hand does not earn any interest so it is not advisable to hold much cash. Money deposited in savings bank account can also be categorized as cash as it can be withdrawn with ease from ATM or bank branch.
Shares or stocks or equity, you may call it by any name but it has the same meaning. Going forward we will use the term equity.
Equity refers to ownership in business. As business owners we have equal right in the profits and losses of a business. In reference to financial planning, when we invest or purchase shares of a company, we are basically buying ownership in that particular company. Return on investment made in equity is in two ways 1) dividend and 2) appreciation in share price. Equity investments are made from two objectives, trading and investing. Trading is for short term (for e.g. 1 day to 1 month) and investing is for long term (for e.g. 10 years to 20 years).