THE DIFFERENCE BETWEEN AN ASSET, A LIABILITY, AND A SECURITY.

I have observed that numerous people can not accurately differentiate between an ASSET, a LIABILITY, and a SECURITY.

The inability to differentiate between these three FINANCIAL TERMS has led many into making wrong financial decisions [ wrong financial decisions like mistaking a liability for an asset; trust me, a lot of people make this mistake ] 

This write-up therefore seeks to correctly explains these three FUNDAMENTAL FINANCIAL TERMS with simple to understand explanations.

 

What is an ASSET and a LIABILITY‬?

Simply put,

  • An ASSET is anything THAT PUTS MONEY INTO your pocket. 
  • A LIABILITY is anything THAT TAKES MONEY OUT of your pocket. 

An ASSET generates PASSIVE INCOME, while a LIABILITY generates EXPENSES.

 

Often times that not, people buy LIABILITIES thinking they are ASSETS. ‬

For example, a HOUSE.

The average person believes that their house is their greatest asset; I am sorry to burst your bubble, but that is INCORRECT.

I will explain why and how using two different scenarios below.

  • Scenerio 1: You own a house which you use for accommodation of yourself and your family.

Occasionally, the house would need some maintenance which would cost you money, and in some countries like USA and Belgium you would also have to pay PROPERTY TAX. Both the maintenance and the tax are expenses generated by the house that takes money out of your pocket; therefore making your house a liability.

 

  • Scenario 2: You own a house, but you make it a rental.‬

You charge a rent of ₦100k per month, which is ₦1.2 million per annum.

House expenses such as repairs, maintenance, and other miscellaneous totals ₦600k per annum

This means you make 600k PASSIVE INCOME per annum*

*[1.2 million-600k = 600k]‬

In this scenario, your house is an ASSET simply because it adds more money to your pocket [passive income] than it takes out [expenses] 

 

Comprende? 😇

 

Well, now that you know the difference between an ASSET and a LIABILITY, let's move on to what a SECURITY is.

 

‪‪What is a SECURITY?‬‬

‪‪A security is something you HOPE will keep your money secure, keyword is "hope" because a security is not guaranteed to keep your money safe.

SECURITIES are bound up tightly by government regulations, which is one of the reasons they are termed "secure", because they are closely regulated by the government. ‬‬However, it is important to note that you can lose some or all of your money if you choose the wrong security to purchase.

A security is also any investment that can be readily transferred or sold for cash. If a SECURITY makes you money, then it is an ASSET. If a SECURITY loses money and such a loss is recorded as an expense, then it is a LIABILITY.‬

‪In fact a SECURITY can change from being an ASSET to becoming a LIABILITY.‬

Examples of a SECURITY includes, Stocks, Bonds, and Options.

‪For example, you bought a 100 shares of stock in XYZ Company in December, 2019 and you paid $10 per share. ‬

‪In February 2020, you sold 10 shares for $20 each; those 10 shares are assets because they generated an income for you.‬

However in March due to Coronavirus, the value of the shares reduced and you sold 10 more shares for $6 dollar. ‬

‪The same stock had become a LIABILITY because it generated a loss, which is an expense.‬

 

I believe by now you now perfectly understand the differences between an ASSET, a LIABILITY & a SECURITY.‬ Below is a recap of the fundamental differences between the three financial terms.

 

  • ‪An ASSET puts money in your pocket.‬
  • A LIABILITY takes money out of your pocket.‬
  • A SECURITY ‬is any investment vehicle you hope will keep your money "secure" and ultimately generate a profit.

 

‪If you found this write-up educative, kindly share to your social media pages for your friends and followers to benefit from reading it too.

Thank you 🙂‬

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