Investing 101: An Overview of Major Asset Classes
An asset can be defined loosely as something that has value to a certain person or party. You can consider cash, stocks, bonds, real estate and mutual funds as assets. With regards to investing there are four major types of assets – cash, bond, property and share.
Asset classes can be broken down into 2 types; defensive and growth oriented. Defensive assets would generate safe and consistent returns to an investor. If you are the type of investor who doesn’t want to take high risks then assets in the defensive category are perfect for you. However, if you are not afraid to take risks and you seek to generate higher returns then assets that fall in growth oriented class are a perfect match for your investor personality profile.
- Cash And Cash Equivalents – this may refer to the paper bills on your pocket but if we will use it as a term in the investment world cash is a type of asset class that includes your short-term investments in the money market and your daily bank transactions. Since investors can easily access these money amounts, these are considered cash investments that lower the risks on an investment portfolio. However, the scope for capital growth is very limited. Investors can only expect a low level profit return with cash investments. The main advantage with this asset class is that the risks of losing money are close to zero. Cash has a relatively short investment timetable and provides stable, low-risk returns.
- Fixed Income – this refers to government bonds or any type of bonds and CDs (certificates of deposit). This asset class will yield fixed rates once it reaches the maturity period so it is quite similar to a loan. Bonds are low-risk investment assets but the rate of return is lower compared to property and shares. Aside from being a low risk investment, they are also highly liquid so you can convert them to cash anytime you want. The only “risk” associated with a fixed income class is the counterparty risk or the risk that you don’t get paid for the money that you lent to the borrower.
- Real Estate And Commodities – Another popular asset class is real estate/ property and commodities. Investors who are looking for a regular income stream invest in residential and commercial properties. Properties generate a steady flow of income (rent) in the long run that can fund your retirement or your daily expenses. Property investments include rental homes, condominium units, retail outlets and a lot more.
- Equities – Equity investments refer to purchased shares in the stock market. An investor buys shares on the stock market to get income from capital gains when the stock value goes up. When you own equity or a share it means you are a part owner of a business or a “shareholder”. You will gain profits if the business grows since the value of the company will also increase. However, if the value of the company or business you own a share in falls you will lose a significant amount of money. The risk involved in share investments is pretty high.
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