What Is an Asset Class?

An asset class groups 澳洲幸运5官方开奖结果体彩网:investments that have 𒆙similar attributes and are subject to the same laws and regulations. It contains securities that often behave similarly to one another in the marketplace.

Common ✃asset classes include equities, fixed income, commodities, and real estate.

Understanding Asset Classes

There is usually very little correlation and sometimes even a negative cor𓆏relation between different asset classes. This characteristic is important and necessary for investors.

That's because if all asset classes' price movements moved in the same direction at the same rate, then investors could suffer great financial loss in dropping markets.

Historically, the three main asset classes have been equities (stocks), 澳洲幸运5官方开奖结果体彩网:fixed income (bonds), and 澳洲幸运5官方开奖结果体彩网:cash equivalents or money market instruments.

Most investment professionals consider real estate, 澳洲幸运5官方开奖结果体彩网:commodities, futures, other financial 澳洲幸运5官方开奖结果体彩网:derivatives, and even 澳洲幸运5官方开奖结果体彩网:cryptocurrencies to be asset classes.

Investment assets include both tangible and intangible instruments that 澳洲幸运5官方开奖结果体彩网:investors buy and sell for the purposes of generating additional income, on either a short- or 澳洲幸运5官方开奖结果体彩网:long-term basis.

Financial advisors view 澳洲幸运5官方开奖结果体彩网:investment vehicles according to their asset classes for 澳洲幸运5官方开奖结果体彩网:diversification purposes.

Each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio risk through asset class diversification.

Financial advisors help investors diversify their 澳洲幸运5官方开奖结果体彩网:portfolios by combining assets from different asset classes that have differentꦯ cash flow streams and varying degrees of risk.

Investing𓆏 in several different asset classes ensures a certain amount of diversity overall. Diversification reduces risk and increases the probability of earning a positive return.

Types of Asset Classes

澳洲幸运5官方开奖结果体彩网: The most 🍨common asset classes are:

Cash and Cash Equivalents

Cash and cash equivalents represent actual cash on hand and securities that are similar to cash. These investments are considered very low risk since there is little to no chance of losing your money. The consequent peace of mind means the returns are also lowe🧜r than those of other asset class🍸es.

Examples of cash and cash equivalents include cash parked in a 澳洲幸运5官方开奖结果体彩网:savings account as well as U.S. government 澳洲幸运5官方开奖结果体彩网:Treasury bills (T-bills), 澳洲幸运5官方开奖结果体彩网:guaranteed investment certificates (GI🐈Cs), and 澳洲幸运5官方开奖结果体彩网:money market funds.

Generally, the greater the risk of losing money, 澳洲幸运5官方开奖结果体彩网:the greater the prospective return.

Fixed Income

Fixed income securities offer investors a fixed income stream. You buy a bond (lend money) and, in return, receive set payments of interest every year until the security's 澳洲幸运5官方开奖结果体彩网:maturity date. When the security matures, the m🍒oney𒅌 you initially invested is paid back to you.

Government and corporate bonds are the most common types of fixed-income products. The government or company pays you interest for the life of the loan, with rates varying depending on 澳洲幸运5官方开奖结果体彩网:inflation and the🅠 perceived risk that they won’🎃t make good on the loan.

The risk of certain governments 澳洲幸运5官方开奖结果体彩网:defaulting on their bonds is very low, so they pay out less. Conversely, some companies risk going bust and need to pay investors more to convince them to lend their money.

Equities 

When people talk about equities, they are usually speaking about owning shares in a company. For companies to expand and meet their objectives, they often sell slices of ownershꦰip to the general publ📖ic in exchange for cash.

Buyin🦩g these shares can be a great way to profit from the success of a company.

There are twℱo ways to make money by investing in companies:

• The company may pay a cash dividend
• You sell the shares for more than you paid for them

The market can be volatile, though. Share prices are k⛄nown to fluctuate, and some companies may even go bust.

Commodities

Commodities are basic goods that can b♕e transformed into other goods and services. Examples include metals, energy resources, and agricultural goods.

Commodities are crucial to the economy and, in some cases, are viewed as a good hedge against inflation. Their return is based on 澳洲幸运5官方开奖结果体彩网:supply and demand dynamics rather than profitability.

Many investors invest indirectly in commodities by buying shares in companies that produce them. However, there is also a huge market for investing directly, whether that is actually buying a physical commodity with the view of eventually selling it for a profit or investing in futures contracts.

Alternative Asset Classes

Equities, bonds, cash or marketable securities, and commodities are the most liquid asset classes and, therefore, t🗹he most quoted asset classes.

There are also alternative asset classes, such as 澳洲幸运5官方开奖结果体彩网:real estate, and valuable inventory, such as artwork, stamps, and o꧟ther tradable collectibles.

Some analysts refer to an investment in 澳洲幸运5官方开奖结果体彩网:hedge funds, 澳洲幸运5官方开奖结果体彩网:venture capital, 澳洲幸运5官方开奖结果体彩网:crowdsourcing, or cryptocurrencies as examples of ꦚalternat♉ive investments.. 

That said, an asset’s 澳洲幸运5官方开奖结果体彩网:illiquidity does not speak to its return potential; it only means that it may take more time to find a buyer should you wish to conv💯ert the asset to cash.🍌

Asset Class and Investing Strategy

Investors looking for alpha employ investment stra🍎tegies focused on achieving alpha returns. Investment strategies can be tied to growth, value, income, or a variet💟y of other factors that help to identify and categorize investment options according to a specific set of criteria.

Some analysts link criteria to performance and/or valuation metrics such as 澳洲幸运5官方开奖结果体彩网:earnings-per-share (EPS) growth, or the 澳洲幸运5官方开奖结果体彩网:price-to-earnings (P/E) ratio. Other analysts are less concerned with performance and more ♋concernℱed with the asset type or class.

The Bottom Line

An asset class is a grouping of investments that exhib🍎it similar characteristics and that may be subject to the same rules and regulations. Eq♊uities, fixed income, commodities, and real estate are common examples of asset classes.

Asset classes can be used to diversify portfolios and reduce risk, as each class typically reflects different risk and return characteristics. Buil🦄ding a portfolio with asset classes that are not highly correlated with one another is an important concept 💝for successful diversification.