Asset Classes
Assets are the subject of trading. Analysts generally group the financial assets with similar structure together and categorize them into five asset classes:
- Stocks, shares and equities
- Fixed income investment
- Cash equivalents
- Real estate
- Financial derivatives
1. Stocks, shares and equities
Definition:
Stocks, shares and equities are units of ownership in a company. In other words, you are buying an ownership in a company when you purchase either stocks, shares, or equity. And once you purchased at least a unit of them, you become a ‘’shareholder’’ and own a part of the company.
Where can I trade stocks, shares, and equity?
Stocks, shares and equities are traded on stock exchange, the market where stock sellers connect with stock buyers. Well known stock exchanges include the New York Stock Exchange (NYSE) and the Nasdaq.
How can I profit out of stocks, shares, and equity？
A shareholder can profit through two ways: (1) a rise in the share price, or (2) dividend payment.
2. Fixed income investment
Definition:
Fix income investment is referred to as investments in securities that pay a fixed rate of return in the form of interest. Government and corporate bonds are the most common form of fixed-income investments.
Where do I trade fixed income investment?
Fixed-income securities are mostly traded through (1) a broker, (2) mutual funds, or (3) exchange-traded funds.
How can I profit out of fixed income investment?
The investors are repaid the (1) principal money (the initial money they invested), and (2) interest when the investment security reach maturity.
3. Cash equivalents
Definition:
Cash equivalents refer to as a company’s assets that can be converted into cash immediately. They are short-term (90 days or less) commitments with temporarily idle cash. Common cash equivalents include:
- Treasury bills
- Commercial paper
- Marketable securities
- Money market Funds
- Short-term government bonds
- Banker’s acceptance
What is the main feature of cash equivalent?
Cash equivalents are the most liquid assets. Generally, it is shown on the top line of the balance sheet and can reflect a company’s ability to pay its short-term debt.
4. Real estate investing
Real estate investments are investment in real estate such as house and it involves the purchase, management and sale or rental of real estate for profit.
How do I profit from real estate investment?
There are three main way investors can profit from real estate investment:
(1) become a landlord of a rental property
(2) Buy in undervalued real estate and sell it for a profit
(3) Real estate investment trusts (REITs)
What is the main feature of real estate investment?
The real estate investments are generally considered assets providing protection against inflation.
5. Financial derivatives
Definition:
A derivative is defined as a financial contract whose value is derived from an underlying asset. The way a derivative works is by signing a contract where a buyer agrees to purchase the asset on a specific date at a specific price. Common derivatives are:
- futures contracts
- options
- forwards
- swaps
How do I profit from financial derivatives?
Prices for derivatives come from fluctuations in the underlying asset. Accordingly, investors can profit from financial derivatives by making a calculated bet on the future value of the underlying asset. On top of that, financial derivatives are usually used to hedge against risk.
Diversification:
What are the relationships between different asset classes?
Generally, there is little correlation between the different asset classes, meaning a stock price may tank when real estate is performing well.
What is asset allocation?
Asset allocation is the process of diversifying investment across different asset classes in order to reduce investment portfolio risk.
Have any questions? Anything you want to know more? Comment below!
For more related articles, please visit ‘3 Ways To Trade Assets: Brokers, Dealers and Exchanges‘ and ‘The Money Market and its 7 Financial Instruments‘.