Introduction
Asset class definitions each include a broad range of asset types, but the assets within each class do still usually share certain similarities, such as their legal structures and how they react to certain market conditions.
The three most commonly held asset classes are equities, bonds and cash.
Equities: An equity gives a holder the legal right to a share in the ownership of a company and a portion of its profits. Equities can be the most volatile of the asset classes but they can also deliver some of the strongest returns if they are held for a sufficient length of time.
Bonds: These are IOUs issued by governments and companies, with the promise to pay interest (the coupon) and return the loan value at the end of a set term, or maturity. The amount of interest payable will depend on how creditworthy the borrower is.
Cash: This normally refers to bank and building society accounts although there are also ‘cash’ funds that loan investors’ money on the open market.
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Asset class definitions each include a broad range of asset types, but the assets within each class do still usually share certain similarities, such as their legal structures and how they react to certain market conditions.
The three most commonly held asset classes are equities, bonds and cash.
Equities: An equity gives a holder the legal right to a share in the ownership of a company and a portion of its profits. Equities can be the most volatile of the asset classes but they can also deliver some of the strongest returns if they are held for a sufficient length of time.
Bonds: These are IOUs issued by governments and companies, with the promise to pay interest (the coupon) and return the loan value at the end of a set term, or maturity. The amount of interest payable will depend on how creditworthy the borrower is.
Cash: This normally refers to bank and building society accounts although there are also ‘cash’ funds that loan investors’ money on the open market.
When you invest, you will put your money into one or more of the asset classes. The choice of asset classes is a key decision for investors because they carry very different levels of potential risk and return, even before the risk/returns within each asset class can be weighed up. Equities and bonds are higher risk assets than cash but they also offer the potential for much higher returns, for example.
Investing across the different asset classes is a key element of diversifying portfolios. This is because the characteristics of the asset classes means they should perform differently in various market situations.
Asset class definitions each include a broad range of asset types, but the assets within each class do still usually share certain similarities, such as their legal structures and how they react to certain market conditions.
For example, ‘equities’ includes shares in companies that differ across a broad range of sizes (e.g. small, mid and large capitalised companies), industrial sectors (financials, healthcare, technology) and operate in different geographies. But the basis of their legal structures is generally the same, i.e. giving the right to part-ownership in a company and its profits. Also, bonds can vary along the same lines as equities, but their prices will generally fall in response to a rise in market interest rates.
The main asset classes
The three most commonly held asset classes are equities, bonds and cash.
Equities: An equity gives a holder the legal right to a share in the ownership of a company and a portion of its profits. Equities can be the most volatile of the asset classes but they can also deliver some of the strongest returns if they are held for a sufficient length of time.
Bonds: These are IOUs issued by governments and companies, with the promise to pay interest (the coupon) and return the loan value at the end of a set term, or maturity. The amount of interest payable will depend on how creditworthy the borrower is.
Cash: This normally refers to bank and building society accounts although there are also ‘cash’ funds that loan investors’ money on the open market.
What are the other asset classes?
Categories outside of the main asset classes are known as alternative asset classes. These include, for example:
Property: Owning your home is an investment in real estate but commercial properties also offer investment opportunities. Because of the large sums involved, these are usually accessed via a fund that pools investors’ resources and which have a professional manager who constructs a portfolio of assets. Real estate falls into a category known as ‘real assets’.
Commodities: Physical commodities include oil, precious and base metals and soft agricultural products such as coffee, cocoa and wheat. There are specialist funds that invest in this asset class by storing physical commodities or by using financial instruments known as derivatives that track their prices.
Private equity: This is investment in private companies, i.e. those that are not listed on public stock markets. Such companies are often smaller and have yet to be floated on the stock exchange, although large public companies are sometimes de-listed and taken private. Some investors will own private companies but they can also invest in this asset class via specialist funds.
Using types of asset classes in portfolios
When you invest, you will put your money into one or more of the asset classes. The choice of asset classes is a key decision for investors because they carry very different levels of potential risk and return, even before the risk/returns within each asset class can be weighed up. Equities and bonds are higher risk assets than cash but they also offer the potential for much higher returns, for example.
Investing across the different asset classes is a key element of diversifying portfolios. This is because the characteristics of the asset classes means they should perform differently in various market situations.
