Real Asset

Real assets are physical or tangible assets that have value, due to their substance and
properties. Real assets include precious metals, commodities, real estate, agricultural land
and oil. They are appropriate for inclusion in most diversified portfolios - with their
proportion dependent on the investor's risk tolerance and preferences - because of their
relatively low correlation with financial assets, such as stocks and bonds. They are
particularly well-suited for inflationary times, because of their tendency to outperform
financial assets during such periods. Real assets are investments you can put your hands
on. Sometimes referred to as real property, they include real estate, machinery and
equipment, precious and common metals, and oil.
Real assets are a separate and distinct asset class from financial assets, whose value is
derived from a contractual claim on an underlying asset, which may be real or intangible.
or e!ample, commodities and property are real assets, but commodity futures and "Ts,
as well as real estate investment trusts, constitute financial assets whose value depends on
the underlying real assets.
#igher carrying and storage costs, increased transaction fees and lower liquidity, are
some common drawbacks of real assets in relation to financial assets.
Financial Asset
inancial assets are an asset that derives value because of a contractual claim. Stocks,
bonds, bank deposits, and the like are all e!amples of financial assets. $nlike land and
property--which are tangible, physical assets--financial assets do not necessarily have
physical worth.
% financial asset is an intangible asset that derives value because of a contractual claim.
"!amples include bank deposits, bonds, and stocks. inancial assets are usually more
liquid than tangible assets, such as land or real estate, and are traded on financial markets.
%ccording to the &nternational inancial Reporting Standards '&RS(, a financial asset is
defined as one of the following)
*ash or cash equivalent.
"quity instruments of another entity.
*ontractual right to receive cash or another financial asset from another entity or
to e!change financial assets or financial liabilities with another entity under
conditions that are potentially favorable to the entity.
*ontract that will or may be settled in the entity's own equity instruments and is
either a non-derivative for which the entity is or may be obliged to receive a
variable number of the entity's own equity instruments, or a derivative that will or
may be settled other than by e!change of a fi!ed amount of cash or another
financial asset for a fi!ed number of the entity's own equity instruments.
Agency conflict /Problem
%gency conflict is a conflict of interest inherent in any relationship where one party is
e!pected to act in another's best interests. The problem is that the agent who is supposed
to make the decisions that would best serve the principal is naturally motivated by self-
interest, and the agent's own best interests may differ from the principal's best interests.
The agency problem is also known as the +principal,agent problem.+
&n corporate finance, the agency problem usually refers to a conflict of interest between a
company's management and the company's stockholders. The manager, acting as the
agent for the shareholders, or principals, is supposed to make decisions that will
ma!imi-e shareholder wealth. #owever, it is in the manager's own best interest to
ma!imi-e his own wealth. .hile it is not possible to eliminate the agency problem
completely, the manager can be motivated to act in the shareholders' best interests
through incentives such as performance-based compensation, direct influence by
shareholders, the threat of firing and the threat of takeovers.
&n economic theory, the term agency conflict refers to the danger that individuals within
an organi-ation will act in such a way as to serve their own goals, and that these goals
will come into conflict with those of the organi-ation, such as a corporation, and its
constituents, such as the shareholders. "!treme e!amples of self-interested behavior are
criminal or civil fraud. /ut well short of fraud, some conflicts occur such as when
managers within an organi-ation let their concern over who will get the big corner office
and related titles and perks affect their strategic or operational decisions.
Agency Costs
%gency *osts is a cost that arises from the inefficiency of a relationship between an agent
and a principal. &n a publicly-traded company, agency costs may arise because the
company's e!ecutives 'the agents( may act in their own interest in a way that is
detrimental to shareholders 'the principals(. or e!ample, they may raise their own
salaries to an unrealistic level. %gency costs are best reduced by providing appropriate
incentives to align the interests of both agents and principals.
%gency costs usually refer to the conflicts between shareholders and their company's
managers. % shareholder wants the manager to make decisions which will increase the
share value. 0anagers, instead, would prefer to e!pand the business and increase their
salaries, which may not necessarily increase share value.
&n a publicly-held company, agency costs occur when a company's management or
+agent+ places his own personal financial interests above those of the shareholder or
+principal.+
%gency costs can be either)
%( The costs incurred if the agent uses to company's resources for his own benefit1 or
/( The cost of techniques that principals use to prevent the agent from prioriti-ing his
interests over the shareholders'.
To prevent the agent from acting to benefit himself, shareholders may offer financial
incentives to keep shareholders' interest as the top priority. This typically means paying
bonuses to management if and when share price increases or by making the
management's salary partially shares in the company.
Primary market
The primary markets are where investors can get first crack at a new security issuance.
The issuing company or group receives cash proceeds from the sale, which is then used to
fund operations or e!pand the business. "!changes have varying levels of requirements
which must be met before a security can be sold.
The primary market is that part of the capital markets that deals with the issuance of new
securities. *ompanies, governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue. This is typically done through a syndicate

of securities dealers. The process of selling new issues to investors is called underwriting.
&n the case of a new stock issue, this sale is an initial public offering '&23(. 4ealers earn a
commission that is built into the price of the security offering, though it can be found in
the prospectus. 2rimary markets create long term instruments through which corporate
entities borrow from capital market.
eatures of primary markets are)
This is the market for new long term equity capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also called
the new issue market '5&0(.
&n a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the
investors.
2rimary issues are used by companies for the purpose of setting up new business
or for e!panding or moderni-ing the e!isting business.
The primary market performs the crucial function of facilitating capital formation
in the economy.
The new issue market does not include certain other sources of new long term
e!ternal finance, such as loans from financial institutions. /orrowers in the new
issue market may be raising capital for converting private capital into public
capital1 this is known as +going public.+
The financial assets sold can only be redeemed by the original holder.
0ethods of issuing securities in the primary market are)
2ublic issuance, including initial public offering1
Rights issue 'for e!isting companies(1
2referential issue.
Secondary market
Secondary market is a market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The national e!changes - such
as the 5ew 6ork Stock "!change and the 5%S4%7 are secondary markets.
The secondary market, also called aftermarket, is the financial market in which
previously issued financial instruments such as stock, bonds, options, and futures are
bought and sold. %nother frequent usage of +secondary market+ is to refer to loans which
are sold by a mortgage bank to investors such as annie 0ae and reddie 0ac.
Functions of secondary Market:
&n the secondary market, securities are sold by and transferred from one investor or
speculator to another. &t is therefore important that the secondary market be highly liquid.
%s a general rule, the greater the number of investors that participate in a given
marketplace, and the greater the centrali-ation of that marketplace, the more liquid the
market. undamentally, secondary markets mesh the investor's preference for liquidity
with the capital user's preference to be able to use the capital for an e!tended period of
time.
%ccurate share price allocates scarce capital more efficiently when new pro8ects are
financed through a new primary market offering, but accuracy may also matter in the
secondary market because)
9( 2rice accuracy can reduce the agency costs of management, and make hostile takeover
a less risky proposition and thus move capital into the hands of better managers.
:( %ccurate share price aids the efficient allocation of debt finance whether debt
offerings or institutional borrowing.
Money market
0oney 0arket is a segment of the financial market in which financial instruments with
high liquidity and very short maturities are traded. The money market is used by
participants as a means for borrowing and lending in the short term, from several days to
8ust under a year. 0oney market securities consist of negotiable certificates of deposit
'*4s(, bankers acceptances, $.S. Treasury bills, commercial paper, municipal notes,
federal funds and repurchase agreements.
%s money became a commodity, the money market became a component of the financial
markets for assets involved in short-term borrowing, lending, buying and selling with
original maturities of one year or less. Trading in the money markets is done over the
counter, is wholesale. ;arious instruments e!ist, such as Treasury bills, commercial
paper, bankers' acceptances, deposits, certificates of deposit, bills of e!change,
repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed
securities. &t provides liquidity funding for the global financial system. 0oney markets
and capital markets are parts of financial markets. The instruments bear differing
maturities, currencies, credit risks, and structure. Therefore they may be used to distribute
the e!posure.

The money market developed because parties had surplus funds, while
others needed cash.

Today it comprises cash instruments as well.
The money market functions are)
transfer of large sums of money
transfer from parties with surplus funds to parties with a deficit
allow governments to raise funds
help to implement monetary policy
determine short-term interest rates
Capital market s
*apital market is a market in which individuals and institutions trade financial securities.
3rgani-ations<institutions in the public and private sectors also often sell securities on the
capital markets in order to raise funds. Thus, this type of market is composed of both
the primary and secondary markets. or e!ample, when a company conducts an &23, it is
tapping the investing public for capital and is therefore using the capital markets. This
is also true when a country's government issues Treasury bonds in the bond market to
fund its spending initiatives.
*apital markets provide for the buying and selling of long term debt or equity backed
securities. .hen they work well, the capital markets channel the wealth of savers to those
who can put it to long term productive use, such as companies or governments making
long term investments. inancial regulators, such as the $='s inancial Services
%uthority 'S%( or the $.S. Securities and "!change *ommission 'S"*(, oversee the
capital markets in their designated 8urisdictions to ensure that investors are protected
against fraud, among other duties.
"!amples of *apital market transactions)
1. A company raising money on te primary markets
!. A go"ernment raising money on te primary markets
#. $rading on te secondary markets
%. Capital controls