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Asset Classes definition

There are several types of asset classes available to traders and investors. These include shares a.k.a. equities, money market assets, fixed income assets, or alternative investment options. Within each broad category are many sub-groups that can be traded. Recall that an asset class is a specific group of financial instruments. This particular grouping is done according to shared characteristics. Asset classes must comply with rules and regulations specific to their class. In terms of portfolio management, it is always recommended to spread risk across asset classes, for diversification. This reduces asset-specific risk, and allows for a more balanced financial portfolio across a wider range of assets. In this way, an upswing in one asset class can mitigate the negative effects of a downswing in another.

 

What Types of Asset Classes Are There?

All assets are grouped according to their financial structure. There are 4 unique asset classes, notably:

  • Shares/equities – these are known as stocks. Shareholdings comprise ownership of a public company (listed company). Within this asset class, there are different types of shareholdings such as small-cap stocks, mid-cap stocks, and large-cap stocks. These refer to the market capitalisation of the companies in question. Examples of shares include MSFT, AAPL, MS, CCL, BAC, C, DIS, and thousands of others. Shares are usually listed according to sector or industry.
  • Money market assets – these include liquid assets such as cash/cash equivalents. There is very little growth potential with money market assets, since they can be converted into cash over the short term. Examples include cash in a checking account, savings account, or forex reserves.
  • Fixed income assets – a fixed income asset is one which generates a fixed interest return over time. It then repays the principal amount on the due date. There are many such examples of fixed income assets such as bonds, and certificates of deposit.
  • Alternative investments – real estate holdings, commodities, indices, derivative trading instruments and cryptocurrency are alternative investments. This particular category can encompass a wide variety of options, some of which fall into their own asset class.

Overall, different asset classes share little in common with one another. That’s why they are differentiated as unique classes. From a trading and investment perspective, portfolio diversification is an effective hedge against asset concentration. Asset classes enjoying widespread popularity include the liquid assets. These are also the most-quoted asset classes.

Historically, the highest returns have been reported with stock markets. The Compound Annual Growth Rate (CAGR) of the S&P 500 since the 1920s average is around 7.63% with inflation adjustments and reinvested dividends. The performance of the S&P 500 has far outpaced the performance of similar investments in government bonds. Different asset classes appeal to different types of investors. Each class has a specific risk/return, with high risk, medium risk, and low-risk options available.

Other Terms From -A-

Aggregate Demand definition Aggregate Supply definition Amortisation definition Asset Classes definition At The Money (ATM) definition Auction Market definition Averaging Down definition
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