1. What are Assets?
The house you live in, the car you own, the jewelry you wear or the flour you have in your pantry – these are all your assets. An asset is anything that you own and has some value. Let’s say you are involved in the business of selling used auto parts. The productive capacity of your business depends upon the real assets you have such as scrapped cars, tools for refurbishment and the technical knowledge. Likewise, the productive capacity of Pakistan’s economy depends upon real assets like land, machinery or buildings and their utilization for producing various goods and services for the country.
In contrast to real assets, there is another important category called financial assets. These are nothing more than a piece of paper that don’t have a direct contribution toward the productive capacity of Pakistan’s economy. Then why buy financial assets at all? Well, consider a scenario where you don’t have enough funds to own an auto plant – a real asset. However, you have a way to give away some of your money to Toyota company. In return, you get some shares in Toyota – a financial asset – which reflect that you own 0.01% of this company. In the future, if automobile sector is performing well in Pakistan, you get to share the income derived from an increase in production of Toyota cars. Thus, the money you invest in financial assets can then be used by businesses and corporations to invest in their real assets such as land, building, technology or machinery. Ultimately, the benefit you receive from a financial asset is coming from the income produced by the real assets that were financed by those financial assets.
Financial assets represent a claim on real assets
1.1. Why buy Financial Assets?
Ali earns more than his spending needs. Ahsan, on the other hand, is retired and spends more than he currently earns. At some point in the future, Ali will also indulge in the same behavior exhibited by Ahsan. How to tackle the issue of consumption timing? Well, the ideal solution is to “store” current wealth by purchasing financial assets. This will help you in utilizing savings from a “high-income” period (Ali’s situation) to fund consumption in “low-income” period (Ahsan’s scenario). Therefore, individuals like Ali can invest their savings in financial assets today. If they face a situation like Ahsan, they can sell their financial assets and satisfy consumption needs.