What is an asset class?
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Learn MoreWhat is an asset class?
“Asset class” refers to a type of underlying investment you can make, whether directly through stocks or bonds, or indirectly, through a mutual fund or exchange-traded fund.
An asset class is a group of securities that exhibit similar characteristics and behave similarly in the marketplace.
There are traditional asset classes: equities (stocks), fixed income (bonds) and cash equivalents. There are alternative asset classes: commodities, real estate and hedge funds.
How do asset classes work?
Each asset class are suitable for different investors but depend on individual circumstances and risk and return profiles.
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Equitites (stocks and shares)
Having equity in a company basically means owning a part of it through stocks and shares. These earn money in several ways; most simply, when the company’s stock price rises, your shares are worth more. But that’s not all. If a company is doing well, it can occasionally pay out some of its profits to shareholders in the form of dividends. Finally, a company can buy back its own shares, reducing the number in circulation, and thereby increasing the value of each share.
What's the risk?Stocks are generally considered riskier investments than cash or bonds, because their value can change rapidly. The incentive, though, is that they can offer bigger potential returns over the long run.
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Bonds (fixed income, fixed interest, debt)
A bond is essentially a loan made to a company or government when it needs to raise money. Each bond has a predetermined lifespan, or maturity date. It also has an interest rate that’s agreed to in advance and referred to as the “coupon,” and that is set out as a percentage of the bond’s face value. So when investors buy a bond, they receive a regular income until it reaches its maturity date.
What's the risk?Bonds are generally considered to be low-risk investments, but high-yield bonds issued by smaller companies and emerging market governments are obviously riskier and, in that sense, more like equities.
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Cash
Unlike real estate, cash can be bought and sold easily and quickly. No need to check property lines or hire structural surveyors with dollars and cents. Investors can earn interest on money market funds, but it will generally be at a very low rate. With cash, unlike equities, bonds or real estate, there’s no risk of default. The only thing investors have to worry about is that in the long term cash holdings are likely to go down in value due to inflation. So hiding cash under the mattress isn’t always the best investment strategy!
What's the risk?Cash is considered the lowest-risk asset.