What Types of Asset Classes are there?💭

Analysis written by Vinay Soni

Imagine you're at a bakery with different types of cookies: chocolate chip, oatmeal raisin, and peanut butter. Just like cookies, investments come in different categories called asset classes. An asset class is a grouping of financial instruments that exhibit similar characteristics and are subject to the same laws and regulations. Each class has its own unique flavour (risk and return). Here are some of the main ones:

1. Equities (aka Cookies with Doughy Surprises): These represent ownership in companies. Companies who want to expand often resort to selling ownership in exchange for cash. When the company does well, the stock price goes up (like finding a chocolate chip in your bite!), but if it struggles, the price can fall (like getting a dry cookie). There are two ways to make money from equities: if a company pays a dividend and if you sell the shares for more than you paid for them. They offer high potential returns but also higher risk.

2. Fixed Income aka Bonds (aka Stable Sugar Cookies): Think of these as loans you make to companies or governments. They repay you a fixed amount with interest (like sprinkles!), until the maturity date when they repay you the price of the bond back (called the principal). Bonds offer a steadier, lower return than stocks due to less risk of losing money.

3. Cash and cash equivalents (aka The Jar in Your Pocket): This is money you have readily available, like checking or savings accounts. It's liquid (easy to access), however, it is not ideal for growth as it yields the lowest risk meaning its returns are less than all the other Asset Classes.

4. Commodities (aka Basic Chocolate Cookies): Commodities are basic goods that can be transformed into other goods and services. Examples include metals and energy resources. Their return is based on supply and demand rather than profitability. As Commodities account for changes in inflation, they are a great tool to hedge against inflation (protecting oneself against financial loss)

5. Real Estate (aka The Cookie House): This involves buying property like houses or land. It can offer rental income and potential price appreciation, but it's also illiquid (not easily sold) and requires upfront investment.

6. Alternative Investments (aka The Mystery Box): This is a broad category that includes things like private equity (investing directly in companies), cryptocurrencies and Art. They can offer high returns but also come with high risks and require special knowledge.

Remember: Choosing the right asset classes depends on your goals (saving for college? or retirement?) and risk tolerance (comfortable with ups and downs? or prefer stability?). It's like picking the cookies you like – some might be too risky for you as you may not be familiar with them, while others might not be sweet enough (offer enough return).

Bonus Tip: There are also mixed cookie boxes called mutual funds and ETFs that hold a variety of investments within one package. This can help spread your risk and diversify your portfolio to hedge against financial loss (not putting all your eggs in one basket!).

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