What Are Asset Classes?
An asset class is a group of investments that are categorized together because they have a similar financial structure, are usually 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. This has become especially complicated because of the rise of cryptocurrencies like Bitcoin, and many people have begun to debate whether or not it is its own asset class or not.
Here we will go over what is considered to be five of the major asset classes.
A commodity is something with exchange value like precious metals, oil and gasoline, industrial metals, as well as food like wheat and rice. Their value is determined by supply and demand, so sometimes it can be a little tricky to find out whether or not they are worth investing in unless you are a professional.
If you buy and sell Bitcoin in Canada then you might already know that it is considered a commodity for tax purposes there. While buying Bitcoin is not taxable, selling, trading, or using it to buy something else is a taxable event. When earning a profit from buying and selling Bitcoin, you will need to pay capital gains, but you can also generate short or long term capital losses if money is lost instead.
Stocks or Equities
Stocks or equities represent interest in an entity and they are 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.
Fixed Income or Bonds
An entity can also sell 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 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
Real estate is often considered a great investment because its value usually consistently rises. Real estate and other physical assets are considered a secure asset class because their value is tied to the cost of materials as inflation rises over time.
Where to invest your money often depends on what kind of returns you are looking for. If you want high rewards, you may have to take high risks. If you’re looking for something safer, then consider diversifying your portfolio among multiple asset classes – it might just save you from the next big tanking event in the market.