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Category: Economics

Asset Class List: Categories of Investment Explained

Glint is a gold-based digital payments platform, enabling its clients to buy, save, send, and spend real, allocated gold and other fiat currencies. Bu...

23 March 2022

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Glint is a gold-based digital payments platform, enabling its clients to buy, save, send, and spend real, allocated gold and other fiat currencies. But whilst our core service is unrelated to investments, we understand that gold is part of a wider conversation about investing – a topic which is in-depth and sometimes convoluted.

That’s why we’ve put together this comprehensive guide detailing the characteristics of common asset groups, including their benefits and risks.

Use the links below to navigate or read on for the complete guide.

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What is an Asset Class?

An asset class is a way to group assets that share similar characteristics. For example, equities (stocks) are comparable in terms of risk, return, and methods of trading, so they fall under a single asset class.

That’s not to say that all assets within a class are the same, however. Some assets carry higher risks or may be less liquid than others, but they’re still largely comparable and thus are treated within a single asset class.

The differences between asset classes are much broader than for individual assets. For example, how assets are regulated can play a significant role in defining their classification, with stocks and bonds treated wholly differently from a regulatory perspective.

So, now that we’ve covered the broad definition of what asset classes are, let’s move on to look at the main asset classes, their characteristics, and benefits.

What Are the Main Asset Classes?

While there are no hard-and-fast rules on asset classification, there are three principal asset classes that are considered the traditional categories. These are:

  • Equities (stocks)
  • Fixed income (bonds)
  • Cash (and cash equivalents)

Let’s take a closer look at the typical characteristics, benefits, and risks of these three main asset classes.

Equities

Characteristics

Equities in the form of stocks are typically shares of ownership in publicly traded companies. Highly liquid, equities are very sensitive to peaks and troughs in the economic landscape, making them a high-risk, high-return investment prospect.

Benefits

Managed well, and equities can bring high, long-term returns, providing both capital growth and sustainable income. They also have low transaction costs compared to other asset classes, and are considered among the easiest starter assets for beginners at the start of their investment journey.

Risks

With huge fluctuations in share prices, equities are a high-risk asset by nature. Prices move considerably faster than other asset classes, which means careful management is needed to curtail risk and protect capital. Equities are also within the asset class most easily influenced by performance drivers, including market confidence, economic growth, and individual company profits.

Fixed Income

Characteristics

The fixed income asset class is primarily based around bonds, a type of loan that’s issued by an investor to a borrower (usually a business or government). Since fixed income assets are a form of debt, they’re sensitive to interest rates and credit risk, with returns consisting of bond price per growth and income (in the form of coupon payments).

Benefits

Fixed income assets offer unique benefits from an investment perspective. First, they’re considered less risky than equities, since bondholders are always paid before shareholders, so there’s more assurance of reliable returns. This, in turn, makes them a reliable income source, as well as an excellent means of diversifying an existing investment portfolio.

Risks

Though considered marginally safer than equities, naturally, fixed income assets aren’t without risk. Steeply rising interest rates and inflation can cause income to flatline for bondholders, while there’s also a risk of losing high capital volumes should a company go belly-up. What’s more, it’s generally more difficult to understand what you’re investing in and how your money is being used with bonds, which can be disconcerting as an investor.

Cash

Characteristics

A cash asset refers to cash that’s available to hand, either in a bank or savings account, or in items that can be easily and readily converted to cash (such as life insurance or marketable securities). Other examples of cash assets include treasury bills, commercial papers, and money market funds. Cash is the safest and most liquid asset, though low returns may mean they’re not the most lucrative option.

Benefits

Cash assets are without doubt the safest asset class, with none of the risks associated with equities and bonds. They’re also the most liquid, meaning they can be used quickly within the market at a price that reflects their intrinsic value.

Risks

The disadvantages of cash assets are less about risk and more about missed opportunities. Without strategic investment and placement, cash assets offer very little by way of returns. What’s more, their value can be eroded by inflation in the long term, so careful management is needed to get the balance right.

Alternative Asset Classes Beyond the ‘Big Three’

Of course, there is a whole lot more to the investment landscape than these three traditional asset classes, and new categories and opportunities continue to emerge. But where else do investors place their money beyond the ‘big three’ asset classes? Let’s take a look.

Commodities

Commodities have long been a popular means of portfolio diversification, offering a way to hedge against inflation while making reliable returns in times of economic disruption. There are lots of commodities out there, but some of the most popular (and lucrative) include gold and other precious metals, agricultural commodities, and energy.

Real Estate

A low-risk, low-return asset, real estate assets include sales of both residential and commercial property, as well as land. While real estate is sensitive to changing market conditions, it does generally offer consistent returns in the form of capital gains and income. Of course, location and purchase price are key value drivers for this asset class, while transaction and administrative costs are high.

Infrastructure

Providing a good inflation hedge and lower risk than equities, infrastructure is a long-term asset class that shares similarities with real estate. Examples of infrastructure assets include roads, railways, water and energy production, storage, and distribution.

Private Equity 

Like standard equity, private equity is a stake in a business. However, such opportunities aren’t traded on public exchanges, which means they can offer higher returns but also higher risk than their public counterparts. As such, comprehensive due diligence is needed to assess volatility and risk.

Other Asset Classes

Today, there are a huge number of asset classes out there, and investors are always looking for new avenues through which to diversify. From insurance and hedge funds to art, collectables, wine and forestry, each asset class brings its own pros, cons, and prospective returns, so careful management is needed to balance risk with reward.

Why Asset Class Diversification is Important

Typically, investors seek to ‘diversify’ their asset portfolio as a means of making the biggest return with the least amount of risk. That means the most successful financiers acquire a carefully considered mix of assets, usually from two or more asset classes.

Diversification is all about mitigating risk while driving potential returns. So, a single investment portfolio might contain assets of multiple classes, each counteracting the other to ensure reliable long-term income and reduced risk of loss.

Say, for example, you were to invest in an equity. Though capable of generating big returns, such assets are high risk, and susceptible to external influences and market conditions. Investing in other assets, such as commodities, can counteract this risk, ensuring reliable income in times of economic uncertainty.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
 
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