What is an Asset Class?
An asset class is a group of securities that have similar characteristics, behave similarly in the market, and is subject to the same laws and regulations. The three main asset classes are stocks or stocks; fixed income or bonds; and their equivalents, or money market instruments. Some investment professionals add real estate and goods, and possibly other types of investments, to a combination of asset classes.
Asset Class Types
Stocks or stocks; bonds or fixed income securities; cash or commodity securities; and goods are the most liquid asset classes and therefore the most quoted asset classes. Alternative asset classes exist, such as real estate, artwork, stamps, and other collectibles sold. Some analysts also cite investment in hedge funds, venture capital, crowdsourcing, or even bitcoin as examples of alternative investments. The more alternatives, investments are generally less liquid. However, the illiquidity of an asset does not indicate its return potential; This means that it may take longer to find a buyer to convert the asset into cash.
Traditional asset classes
Traditional asset classes include major categories of stocks, bonds, and cash. Let’s consider each of them.
Shares are securities that represent the property in a company. There are two main classifications of stocks; ordinary and privileged. Holders of ordinary shares, as a rule, can vote at meetings of shareholders and receive dividends. Holders of preferred shares most often cannot vote but have higher rights to the assets and profits of the company than ordinary shareholders.
Key stock characteristics include value, dividends, growth, market capitalization (medium, large), domestic, foreign, and developing. Here is a brief simplified explanation for each:
- Share price: at what price is the asset traded.
- Dividend share: dividends are periodically paid on securities.
- Stock growth: investor potential profit.
- Small shares: The company’s market capitalization is below $ 2 billion.
- Mid-sized stocks: The company has a market capitalization of $ 2 to $ 10 billion.
- Large stocks: The company’s market capitalization exceeds $ 10 billion.
- Domestic shares: the company is located in the country in which the investor resides.
- Foreign shares: the company is located in a foreign country.
- Emerging Stocks: The company is located in a developing country.
Bonds are debt investments. The investor lends money that is returned by the borrower at a fixed interest rate. Borrowers are usually corporations or government agencies. Types of bonds include junk, investment, government, corporate, short-term, medium-term, long-term, domestic, foreign and developing. Here is a brief simplified explanation for each:
- Junk bonds have a higher default risk than investment-grade bonds but offer higher yields.
- Investment-grade bonds have a low risk of default.
- Government (government) bonds: issued by the government to maintain government spending at the required level.
- Corporate bonds: issued by corporations.
- Short-term bonds: maturity within 3 years.
- Medium-term bonds: maturity within 3-10 years.
- Long-term bonds: maturity more than 10 years.
- Domestic bonds: securities of the company in the country where the investor resides.
- Foreign bonds: the company operates in a foreign country.
- Developing bonds: the company operates in a developing country.
Cash and cash equivalents are the most liquid assets. These include cash, as well as cash equivalents, that are easily converted to cash (such as treasury bills).
Alternative asset classes
Alternative assets are less traditional and sometimes even unexpected investment options. These asset classes include goods, real estate, collectibles, foreign exchange, insurance products, derivatives, venture capital, private capital, and distressed securities.
Goods are commodity products produced for the benefit of consumers. For example, precious metals, agricultural products or electricity.
Real estate may include commercial and residential real estate, as well as mixed assets of investment funds. This includes land and everything that is inseparably connected with this land. Real estate investment funds are companies that own and manage profitable real estate.
Collectibles are things that are more expensive than items that are not subject to collecting, due to rarity or demand. This can include works of art, antiques, fine wines, classic cars, stamps, and coins.
Foreign currency is a currency not used in the investor’s country.
Insurance products include life insurance and annuities. An annuity is created when a person pays a life insurance premium, which will be returned to the person over time.
Derivatives are financial contracts that receive their value from the execution of another asset or interest rate. These contracts may include futures, forwards and / or options.
Venture capital is money invested in startups and small enterprises that have long-term growth potential. Of course, there is a high risk, promising, however, a great reward.
Private capital consists of investments made privately and not publicly quoted. Investors invest directly in private companies. This capital is usually raised to finance new technologies or to acquire fixed assets.
Distressed securities belong to companies on the verge of bankruptcy or almost “fallen”. Despite the high risk, they can be bought cheaply, and these assets can become profitable if the situation in the company is not as catastrophic as the market believes.
Asset Class and Investment Strategy
Alpha-seeking investors use investment strategies that focus on achieving alpha returns. Investment strategies may be associated with growth, value, income, or a number of other factors that help identify and classify investment options in accordance with a specific set of criteria. Some analysts associate the criteria with performance indicators and / or estimates, such as earnings per share (EPS) or price-earnings ratio (P / E). Other analysts are less concerned about performance and more related to the type or class of assets. Investing in a specific asset class is an investment in an asset that has a specific set of characteristics. As a result, investments in the same asset class tend to have similar cash flows.