Four Asset Classes to Consider Before Investing!
An investment is an essential aspect of everyone’s life. It is elementary for everyone to have a sound financial plan which can save a person at callous times. To invest, one must have a good knowledge of various asset classes.
An asset class, by definition, is a collection of investments that share many similarities. This is including how they behave in the market. These similarities also include their behavior in the market, various government regulations, and the purchasing process. In the current day and age, we can classify asset classes broadly into four types.
A stock represents an aggregation of shares in a company. In the simplest terms, a share or a stock is a share in the company. Thus equities represent ownership. When you, as an individual, decide to buy 100 shares of a company that has 1000 shares in totality, you become a 10% owner of the company.
Thus as an owner of the company, you have rights to a portion of its profits. Thus, the dividend you earn by investing in the company is the reward you reap. There are also times when the company decides to reinvest the dividend into the company for different purposes ranging from diversification, machinery, expansion, etc.
You must not apply these investment principles uniformly across all spaces. For instance, it is a very different ball game to invest in a startup than investing in a blue-chip stock that has been in the market for decades. One must be prudent and always exercise caution while investing.
Fixed income and debt
Institutional bonds are issued when institutions borrow money from you and assure you that they promise to return the money with interest. These interest payments on the loan are issued in the form of periodic payments. And the bondholders get a payment throughout the bond’s life. They get their principle back at the end of the maturity period. These are safe asset classes to invest, but the rate of return is subjective.
For example, if you buy a $10000 five year bond, let us assume that it has an interest rate of 2%. You will be receiving bi-annual payments of $100 for five years.
Money Market and Cash
This asset class includes physical bills and coins in your possession and in your bank account. Cash is money in liquid and ready to spend form and includes both local and foreign currency. Although governments have a cap on how much foreign currency an individual can possess, you can possess it as long as it is within the permissible limits. Cash equivalents, unlike stocks and other assets, must have a market price that does not fluctuate.
Tangible assets and Real Estate
Tangible assets are something that you can physically see and touch. They typically have a grouping of their own. Some of the classic examples of tangible assets are cash, inventory, and vehicles, to name a few. Real estate is one of the safest asset classes as land and real estate related assets generally tend to appreciate some times like gold. They are safe bets as they can withstand periods of inflation. A few nations allow their citizens to invest in land and real estate outside their nation. This allows people to diversify their investment and diversify their risks.
One of the main reasons people must invest in all types of asset classes is that it prevents downfalls and takes advantage of each asset class’s strengths. The principle of asset allocation stems from the fact that one needs to diversify his/her portfolio to de-risk. Various asset classes also give the individual financial flexibility by enabling them to take risks with any asset classes, which may give you higher returns.
One of the points that investors must keep in mind while investing they can be bullish in terms of their investment during their younger days, and as one gets closer to retirement, one must have a conservative portfolio. Talking to your financial advisor and getting a better picture of which of these investments would work better for you would be a great way to go ahead with the investments. Remember that each of them comes with their own set of risks, and you should be in a position to handle that when you invest!
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