Paper asset

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Paper asset
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Definition of paper asset depends of area that it is related[1]:

  1. Business assets means assets that cannot be easily change into cash, which also means they are not easy to use or sell as well. These kind of assets cause low liquidity and have only paper value,
  2. Investments assets means assets that are representing something, they define its ovnership. These might be currency, bond, stock, money market account, bank deposits, other types of investments. There have to be a working banking system in the background so that these assets can be easily exchanged. On the other hand, their value depends on economic situation - when the financial system collapses, value of assets is decreasing.
  3. Fiat currencies assets are all of them are paper assets, for example U.S. dollar or Swiss Franc. U.S. dollars do not have any longer coverage in running gold standards, they are used governments and currency users. The Swiss Franc has however back up in electonic currency, due to Swiss law.

Paper assets versus hard assets

Paper assets (also called financial assets) and hard assets (also called real assets) are the opposite terms. Hard assets have actual value in the nature of themselves. When financial system collapses, these assets have much better value than papper assets. Real assets value influences the value of financial assets. Hard assets would be[2][3]: building, machine, gold, silver, oil, diamonds, land, platinum or other psysical holdings.

To show the diffence on an example: not everybody can own the car factory (the real asset) but many people can hold shares of it (financial asset) and get some income from the production. Moreover, Dash A. P. explained six differences between them[4]:

  1. Paper asset does not determine wealth of the society or economy, hard assets are.
  2. Paper assets does not influence production capacity directly, they support it indirectly due to transfers of money, hard assets are influence capacity directly.
  3. Paper assets allocate the income among investors, while real assets are producing goods or services.
  4. Paper assets are included in the both sides of the balance sheet, while real assets only in the asset part.
  5. Hard assets are destroyed by accident or over time, paper assets are destroyed once business is finished.
  6. Investing in paper assets is less risky than investing in real assets.

Author: Dominika Zaich

Footnotes

  1. Herold T. (2014), p.205
  2. Herold T. (2014), p.205
  3. Dash A. P. (2013), p.49
  4. Dash A. P. (2013), p.50

References