If you’re new to the investment game you may have heard the term “asset classes” used online and by financial experts, but what exactly are they? Specifically, how do they work and how should they be utilized to make the best of your investments?
So What Are They?
An asset class is when a group of investments are categorized together because they have a similar financial structure, are typically traded in the same financial markets, and are subject to the same rules and regulations. By diversifying your investment portfolio into multiple asset classes you can reduce the overall risk level of your investments because they are spread out across multiple sectors.
There are generally four broad classes of assets, but some financial experts claim there are only three or as many as five.
A qualified wealth manager can provide you with more information and guidance on what asset classes are and how they can be used to your advantage. Click here for more information about how Wealth Management Canada can connect you with the best asset management firms.
Stocks or Equities
Stocks or equities represent an ownership interest in an entity (company) and is represented by the value left over after subtracting all of an entity’s debts associated with that asset. By purchasing equity interest in the form of stock shares in stock exchanges or over-the-counter markets an investor can share in a company’s profits.
When you receive a portion of a company’s profits this is referred to as dividends. But you can also make money by buying and selling stocks – when a stock has risen in value you can sell it at a higher price than what you bought it for.
Fixed Income or Bonds
Besides selling stock options, when a corporation wants to receive financing it can do so by selling bonds or fixed investments which guarantee a return on the principal amount paid as well as interest over the course of the loan. While bonds tend to not offer high returns and can run the risk of losing you money, they are generally considered to be less risky than investing in stocks or other asset classes because of the guaranteed returns.
Cash or Cash Equivalents
Cash or cash equivalents refer to the value of a company’s assets that are cash or can be easily converted into cash. Examples of cash equivalents include commercial paper, marketable securities, money market funds, short-term government bonds, or treasury bills.
These kinds of asset classes are valued because of their liquidity, meaning that the price will remain mostly consistent regardless of whether they are purchased or sold.
Real Estate or Other Physical Assets
It’s regularly said that real estate is one of the best investments you can make, as the investment usually pays off in the long-run as the value of your property grows. Real estate and other physical assets are considered an asset class that offers protection against inflation because they typically increase in value during times of inflation as the cost of materials rise.
Ask an Expert
There’s a lot to choose from when creating your investment portfolio. Your best investment would be to talk to a wealth advisor who can help you create the perfect portfolio for your individual needs.