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In finance, an asset class is a group of
financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
s that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with
real assets Real Assets is an investment asset class that covers investments in physical assets such as real estate, energy, and infrastructure. Real assets have an inherent physical worth. Real assets differ from financial assets in that financial assets get ...
and those having to do with
financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than other tangible assets, such as ...
s. Often, assets within the same asset class are subject to the same laws and regulations; however, this is not always true. For instance, futures on an asset are often considered part of the same asset class as the underlying instrument but are subject to different regulations than the underlying instrument. Many investment funds are composed of the two main asset classes, both of which are
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
:
equities In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
(
stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s) and
fixed-income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
( bonds). However, some also hold
cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...
and foreign currencies. Funds may also hold
money market instruments Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
and they may even refer to these as cash equivalents; however, that ignores the possibility of default. Money market instruments, being short-term fixed income investments, should therefore be grouped with fixed income. In addition to stocks and bonds, we can add
cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...
, foreign currencies,
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
,
infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...
and
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
to the list of commonly held asset classes. In general, an asset class is expected to exhibit different risk and return investment characteristics, and to perform differently in certain market environments. Asset classes and asset class categories are often mixed together. In other words, describing large-cap stocks or short-term bonds as asset classes is incorrect. These investment vehicles are asset class categories, and are used for
diversification Diversification may refer to: Biology and agriculture * Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes * Agricultural diversification involves the re-allocation of some of a farm's resources to n ...
purposes. Multiple asset classes mixed together in a fund structure can provide an investor with exposure through a single relationship. While the bulk of the global funds are traditional in nature, as is the case of a
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...
, some funds would be classified as alternative investments such as
hedge funds A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as shor ...
, often considered an asset class of their own particularly for institutional investors. Most financial experts agree that some of the most effective investment strategies involve diversifying investments across broad asset classes like stocks and bonds, rather than focusing on specific securities that may or may not turn out to be "winners". Diversification is a technique to help reduce risk. However, there is no guarantee that diversification will protect against a loss of income. The goal of asset allocation is to create a balanced mix of assets that have the potential to improve returns, while meeting your: *Tolerance for risk (market volatility) *Goals and investment objectives *Preferences for certain types of investments within asset classes Being diversified across asset classes may help reduce volatility. If you include several asset classes in your long-term portfolio, the upswing of one asset class may help offset the downward movement of another as conditions change. But keep in mind that there are inherent risks associated with investing in securities, and diversification doesn't protect against loss.


Types

Stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s - Also called equities *Represent shares of ownership in publicly held companies *Historically have outperformed other investments over long periods (keep in mind that past performance does not guarantee future results) *Most volatile in the short term *Returns and principal will fluctuate so that accumulations, when redeemed, may be worth more or less than original cost
Fixed income Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the prin ...
- Fixed income, or bond investments, generally pay a set
rate of interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinc ...
over a given period, then return the investor's principal. *Set rate of interest *More stability than stocks *Value fluctuates due to current interest and inflation rates *includes "guaranteed" or "risk-free" assets *Also includes
money market The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. As short-term securities became a commodity, the money market became a compon ...
instruments (short-term fixed income investments)
Cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...
- Also called currency, or medium of exchange *Liquidity *Ability to buy anything Foreign Currencies - Also called FX, or foreign exchange
Real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
- Buildings (houses, terrain lots, etc.) or investment property, plus shares of funds that invest in commercial real estate. *Helps protect future purchasing power as property values and rental income run parallel to inflation *Values tend to rise and fall more slowly than stock and bond prices. It is important to keep in mind that the real estate sector is subject to various risks, including fluctuation in underlying property values, expenses and income, and potential environmental liabilities. Infrastructure as an asset class *Broad category including highways, airports, rail networks, energy generation (utilities), energy storage and distribution (gas mains, pipelines etc.) *Provides a longer duration (facilitating cash flow matching with long-term liabilities), protection against inflation, and statistical diversification (low correlation with ’traditional’ listed assets such as equity and fixed income investments), thus reducing overall portfolio volatility
Commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
- Physical goods such as gold, copper, crude oil, natural gas, wheat, corn, and even electricity. *Helps protect future purchasing power as values have fixed utility and thus run parallel to inflation *Values tend to exhibit low correlations with stock and bond prices. *Price dynamics are also unique: commodities become more volatile as prices rise. Thus a commodity with a 20% volatility might have a 50% volatility if prices doubled.
Cryptocurrency A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It i ...
*
Decentralized Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group. Conce ...
, "digital gold" * Accessibility; mineable and tradable * Risk-on asset; lacks regulation, ESG concerns, highly volatile * Liquidity varies, majority are lower * Supply varies, some are finite thus
deflationary In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...


See also

* Alternative investment


References

{{Reflist Securities (finance) Investment