The 6 Major Asset Classes, Explained

Asset classes

Estimated reading time: 5 minutes

Business-minded people are always on the lookout for potential investments. However, they significantly limit the development of their portfolios when they are unaware of their investment options. Like ordering food in a restaurant, it is important to have a menu of items one can choose from and make informed choices based on that menu.

In the business and financial landscape, prospective investors have a variety of assets to consider. Assets that share similar qualities and features are grouped into different classes. Historically, there are four primary groups: cash, bonds, stocks, and real assets. However, the market is developing rapidly, and new forms, such as cryptocurrencies–involving the introduction of crypto exchanges and special wallets like the Monero wallet–have entered the investor’s selection.

For this article, the following list jots down some of the most popular asset groups that investors look into today.

Cash and Cash Equivalents

Among the asset classes, cash and its equivalents are the easiest to understand. They refer to the current amount of money an investor stores in a company, a bank, or other financial institution. Cash equivalents include treasury bills, certificates of deposit, treasury notes, and cash management pools, among other things.

Investing with cash usually translates to a cash deposit in a bank. A person places a certain amount of capital in a bank, and the account accumulates small increments of interest over time. However, while cash bank deposits are easy to accomplish and rank lowest in the investment risk scale, they do not offer high returns. This asset class is best for individuals seeking only to store the money and not to make it grow.

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Fixed-Income Investments (Bonds)

Bonds, in simple terms, refer to a fixed income loan that investors offer to an institution. Investors get a profit through pre-arranged interests that are disbursed to them in regular intervals (usually annually or semiannually) over the bond’s lifetime. After the bond matures, which can range from a year to even a few decades, the institution returns the investor’s initial capital.

The institutions that usually offer bonds are government agencies and corporations seeking to raise funding for their projects from investors, not banks. Compared to the other classes down this list, bonds are considered safer investments because they have a fixed interest rate.

Stocks (Equities)

A stock is a security that shows ownership of a part of a company. Hence, when a person purchases stocks from an establishment or institution, they become a partial owner. Investors seeking to invest in stocks usually go to stock exchanges, where they buy and sell stocks depending on price fluctuations.

The general aim in this asset class is to buy low and sell high. Hence, investors often look for promising start-up companies whose stocks may significantly increase in value over time. That said, investing in stocks does come with risks as there is no assurance of a return, especially with new companies. Hence, investors should be careful about which companies they decide to support.

Mutual Funds

Mutual funds, as the term implies, are the pooling of investors’ money into a collective capital that financial institutions invest in a variety of assets. Think of it like getting a gift basket–similar to when a person acquires many small things in a single purchase. In the same way, when an investor decides to get a mutual fund, their capital is immediately distributed across different assets such as stocks, bonds, and other securities.

The main perk of investing in mutual funds is instant portfolio diversification, which also helps mitigate risks in case one venture fails. The downside, however, lies in overhead costs. Aside from taxes, portfolio managers and brokerages handle the mutual funds, thus incurring extra costs.

Exchange-Traded Funds (ETFs)

ETFs, simply put, work as a combination of mutual funds and stocks. Like mutual funds, they also pool investments for a bundle of curated securities, thus giving investors portfolio diversification. However, like stocks, investors can trade with them throughout the day as market prices change, unlike mutual funds that can only be traded at a final price after the market closes.

In terms of risk, ETFs are generally considered friendlier investments than mutual funds or stocks. For one, investors can trade with them for free, although a few brokers still charge a small commission. Moreover, unlike mutual funds, there is no minimum investment amount for ETFs, which opens the door for newer investors.

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Real Assets

As one may infer from the name alone, real assets are tangible high-value securities. They are commonly divided into two groups: commodities and properties. Commodities refer to precious metals, energy sources (e.g. oil, natural gas), livestock, and agricultural products. Meanwhile, properties often refer to real estate, including residential and commercial estates.

While investing in real assets may seem straightforward, the barriers to entry are high. For example, properties require a substantial amount of capital before a person can invest in them, which may not be available to every investor.

Overall, investors have plenty of assets to choose from, and the selection has become significantly bigger with the introduction of alternative investments like cryptocurrencies. With a better understanding of how these assets work, individuals can have a clearer idea of which direction they can take to bolster their portfolios.

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