What is an asset class?
How do asset classes work?
Each asset class are suitable for different investors but depend on individual circumstances and risk and return profiles.
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Equitites (stocks and shares) Having equity in a company basically means owning a part of it through stocks and shares. These earn money in several ways; most simply, when the company’s stock price rises, your shares are worth more. But that’s not all. If a company is doing well, it can occasionally pay out some of its profits to shareholders in the form of dividends. Finally, a company can buy back its own shares, reducing the number in circulation, and thereby increasing the value of each share. |
| What's the risk? |
Stocks are generally considered riskier investments than cash or bonds, because their value can change rapidly. The incentive, though, is that they can offer bigger potential returns over the long run. |
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Bonds (fixed income, fixed interest, debt) A bond is essentially a loan made to a company or government when it needs to raise money. Each bond has a predetermined lifespan, or maturity date. It also has an interest rate that’s agreed to in advance and referred to as the “coupon,” and that is set out as a percentage of the bond’s face value. So when investors buy a bond, they receive a regular income until it reaches its maturity date. |
| What's the risk? |
Bonds are generally considered to be low-risk investments, but high-yield bonds issued by smaller companies and emerging market governments are obviously riskier and, in that sense, more like equities. |
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Cash Unlike real estate, cash can be bought and sold easily and quickly. No need to check property lines or hire structural surveyors with dollars and cents. Investors can earn interest on money market funds, but it will generally be at a very low rate. With cash, unlike equities, bonds or real estate, there’s no risk of default. The only thing investors have to worry about is that in the long term cash holdings are likely to go down in value due to inflation. So hiding cash under the mattress isn’t always the best investment strategy! |
| What's the risk? |
Cash is considered the lowest-risk asset. |
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Alternatives An alternative investment is an asset that is considered to be outside of the traditional asset classes of equities, bonds and cash. “Alternatives” is a very broad term that encompasses a wide variety of investments, including everything from real assets such as farm land to listed infrastructure funds or open-ended hedge fund strategies. |
| What's the risk? |
Alternatives have a variety of return characteristics, and may have lower correlations with traditional asset classes. They may be illiquid, and can be complex investments. |
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Examples of Alternatives Commodities Commodities refer to physical assets such as metals, oil, grain and natural gas. In most cases, commodities are traded through futures contracts (also called derivatives), which are agreements to buy or sell a certain amount of a commodity for a set price on a given date in the future. So if the price goes down in the meantime, you can make a profit on the difference. These contracts are traded on exchanges, just like stocks and shares. |
| What's the risk? |
Commodities are also considered riskier investments than cash or bonds because, again, prices can rapidly go up and down. Fidelity tends to invest in commodity companies rather than directly in commodities. |
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Real estate As you might imagine, it’s hard to buy and sell real estate quickly. Investors that are interested in real estate can invest in companies that buy and manage properties or mortgages. These are known as “real estate investment trusts (REITs)”. REITs are tradable on stock exchanges and get special tax breaks in exchange for paying out the bulk of their earnings as dividends to shareholders. |
| What's the risk? |
Property is another asset class generally thought to be at the higher end of the risk spectrum, due to the possibility that mortgage holders won’t be able to meet their repayments. |
