Question

Part 3 Short-Answer Questions 1. What is a financial asset's liquidity? 2. Distinguish between primary and secondary markets.

Answer 1

Financial Assets are assets which are liquid in nature unlike fixed assets like land or property. Financial assets can be

1. Cash in hand or cash available with bank in any form like savings, long term deposits,
2. Investments in bonds or stocks, it can be government bonds or corporate bonds.
3. Mutual funds can be referred as financial assets

Now every financial asset has some predefined investment horizon that define whether asset is highly liquid or less liquid, for example investment in stock are more liquid than investment in certificate of deposits which can be long term in nature. Cash at bank is more liquid than investment in mutual funds.

Primary and Secondary Market

Primary market mostly deals with issuing securities for the very first time and  investors put their money into these securities. Issue can be stocks and bonds. IPO (Initial Public Offer) is an example of primary market. Primary market is linked with fund raising activities. Whereas Secondary Market is a market where day to day trading of these securities take place. Securities are listed with stock exchanges, traders or investors trade in these securities to avail short term benefits.

Hope it helps.