Final answer:
Real assets are tangible objects like a house or land, whereas financial assets represent a claim to income or rights to income from the borrower. Real assets include physical items while financial assets like stocks and bonds help finance investments in real assets by businesses. Housing can be viewed as both a real asset and a financial investment because of potential capital gains and the utility of living in it.
Step-by-step explanation:
Assets can be broadly categorized into real assets and financial assets. Real assets are tangible objects that have value due to their substance and properties. Examples of real assets include items such as a house, land, art, and collectibles like rare coins or stamps. These are physical items one can buy and potentially sell at another time, often appreciating in value, providing capital gains.
In contrast, financial assets represent a claim to the income generated by real assets or the right to income from the borrower. Businesses sell financial assets to raise the capital needed to finance their investments in real assets. When a firm buys a machine, builds a new plant, or starts a research and development project—those are investments in real assets. The financing for these projects often comes from financial assets like stocks, bonds, or bank loans. Therefore, financial assets are critical for matching savers' funds with firms' capital needs.
An investment in housing can be seen both as a real asset and a form of financial investment, viewed from the perspective of potential capital gains. Moreover, housing offers nonfinancial returns, such as the utility derived from living in the house. When analyzing the risk involved in different types of financial assets or considering what is important to investors in the financial market, one should keep in mind the nature of the underlying real assets and the expected returns and risks associated with them.