Investors can benefit from knowing how to classify their assets, as it can help them to diversify their portfolios. Being familiar with how to sort their assets can also allow an investor to keep track of their investments and make financial decisions about future investments or purchases. One way to organize assets is by asset class, of which there are many different types. In this article, we define what an asset class is and explore a list of five unique types of asset classes.
What is an asset class?
An asset class is a group of investments that are similar to each other and that experience the same regulations. While assets in the same class have related characteristics, each asset class is typically entirely different than all of the others. Asset classes are also organized around how different types of assets perform in their respective markets. For example, one class of assets might contain passive investments, and another might be made up of only active investments.
One of the most common uses of asset classes is to diversify an investor's portfolio, as investing in assets from different classes can ensure that a portfolio contains assets that differ from each other.
Related: What Is an Asset?
5 types of asset classes
Here are five different types of asset classes:
Equities, sometimes called stocks, are portions of a company that the public can purchase to become shareholders and gain ownership of a business. Equities are one of the most popular forms of investing, as there are many ways to purchase and sell stock from home. Investors can use equities to earn money by purchasing equities that offer dividends, which are payments that are given to shareholders each quarter from a company's revenue. Dividends might take the form of cash payments or stocks.
An investor can also earn money from equities by purchasing equities and then selling them at a later date for a higher price than they paid to buy them.
Related: Equity: Definition and How It Works
Fixed-income securities (bonds)
Fixed-income securities, also referred to as bonds, are assets that involve lending money to a company or government for interest in return. Some common examples of fixed-income securities include government bonds, savings bonds and certificates of deposit. Governments or organizations might offer fixed-income options to raise funds for a specific project or to respond to a challenge in the community. A fixed-income security can offer investors the opportunity to earn money through receiving interest payments on the money they pay or by receiving a larger payment when a bond reaches maturity and, therefore, a higher value.
Cash assets refer to any assets that are made up of cash or cash equivalents. This can include bank accounts, short-term government bonds, treasury bills and commercial papers. One of the most appealing characteristics of cash assets is that they exist as liquid assets, which means they can be used as cash or converted into cash very quickly. This can be especially valuable to investors who frequently reassess their investments and reallocate funds to different investments or purchases. Here is a little more information about a few examples of cash assets:
- Short-term government bond: A short-term government bond is a bond that matures more quickly than typical government or savings bonds.
- Treasury bill: A treasury bill is a short-term debt that matures and can be returned within one year or less.
- Commercial paper: A commercial paper is a debt that large organizations use for short-term financial needs and that matures in less than a year.
Marketable commodities are assets that individuals or organizations purchase that retain their value regardless of how much time passes. Some popular examples of marketable commodities are precious metals like gold and silver, valuable artwork and collectibles that can be sold for high prices. Many investors purchase marketable commodities and hold them to maintain a high value in their assets. However, investors can also sell marketable commodities they own for a higher price than they purchased them to earn money.
While most marketable commodities are acquired by directly purchasing them, investors can also invest in commodities like precious metals through the stock market
Real estate assets are pieces of property that an individual purchases. Real estate investments can include homes that people buy to live in, residential properties that are purchased to rent to tenants or rental properties that owners use as vacation homes. Investing in real estate can offer high returns for investors in situations like flipping a house or when renting to tenants results in a profit. There are also opportunities to invest in real estate without purchasing a property, such as investing in a real estate investment trust, a real estate ETF or a mutual fund.
FAQ about asset classes
Here are a few answers to some frequently asked questions about asset classes:
What are the most common asset cases?
The most common asset cases are equities/stocks, fixed income/bonds, and cash or cash equivalents. However, in recent years, real estate, commodities and cryptocurrencies are increasing in popularity and appearing in investor portfolios more frequently.
Who uses asset cases?
Investors who have assets in their portfolio can use asset cases to sort their assets and determine which types of assets they might invest in next. Financial advisors and other professionals in finance and accounting can also use asset cases to analyze an individual or business' financial standing and make recommendations for future investment decisions.
Why are asset classes important?
Asset classes are important because investors can use them to diversify their portfolio by identifying different types of assets they already own and acquiring assets from classes that they might not currently have. Asset classes can also be crucial to finance professionals when reporting an individual or a company's financial information, as the asset class can help determine where an asset is listed on a balance sheet.