Definition of the asset class

What is an asset class?

An asset class is a grouping of investments that have similar characteristics and are subject to the same laws and regulations. Asset classes therefore consist of instruments that often behave similarly on the market.

Understand asset classes

In simple terms, an asset class is a grouping of comparable financial stocks. For example, IBM, MSFT, AAPL are a group of stocks. Asset classes and asset class categories are often mixed up. There is usually very little and in some cases a negative correlation between different asset classes. This property is an integral part of the investment area.

Historically, the three most important asset classes have been stocks (shares), fixed income securities (bonds), and cash equivalents or money market instruments. Real estate, commodities, futures, other financial derivatives and even cryptocurrencies are currently part of the asset class mix. Fixed assets include both tangible and intangible instruments that investors buy and sell for the short or long term in order to generate additional income.

Financial advisors view investment vehicles as categories of asset classes that are used for diversification purposes. Each asset class is expected to reflect different risk and return characteristics and to perform differently in any given market environment. Investors interested in maximizing returns often do so by reducing portfolio risk by diversifying asset classes.

Financial advisors help investors diversify their portfolios by combining assets from different asset classes that have different cash flows and different levels of risk. Investing in several different asset classes ensures a certain variety in the investment selection. Diversification reduces the risk and increases the probability of your return.

Asset class and investment strategy

Investors looking for alpha employ investment strategies designed to generate alpha returns. Investment strategies can be tied to growth, value, income, or a variety of other factors that help identify and categorize investment options based on specific criteria. Some analysts link criteria with performance and / or valuation metrics such as earnings per share growth (EPS) or the price-earnings ratio (P / E). Other analysts care less about performance than about asset type or asset class. An investment in a particular asset class is an investment in an asset that has certain characteristics. As a result, investments in the same asset class tend to have similar cash flows.

Types of asset classes

Shares (shares), bonds (fixed-income securities), liquid or marketable securities and commodities are the most liquid asset classes and therefore the most heavily listed asset classes.

There are also alternative asset classes such as real estate and valuable inventory such as works of art, postage stamps, and other tradable collectibles. Some analysts also cite an investment in hedge funds, venture capital, crowdsourcing or cryptocurrencies as examples of alternative investments. However, the illiquidity of an asset says nothing about its potential return; It just means that it may take longer to find a buyer to convert the asset into cash.