There are a number of investment asset classes that are further divided into subclasses. The main investment asset classes are cash, fixed income, alternatives and equities. Cash's subordinate class is cash equivalents. Fixed income's subclasses include corporate, Treasury and municipal bonds. Alternatives include real estate and commodities, and equities are subdivided into large cap, mid cap, small cap and emerging markets.
Due to its safety, cash is the most recommended asset class for conservative investors. Accordingly, since investing is associated with a trade-off between risk and return, cash has the lowest return of all the mentioned investment asset classes. Cash equivalents include investments, such as certificates of deposits. These pay higher interest rates than normal savings accounts.
In the fixed income class, corporate bonds are debt instruments issued by firms as one of the means of financing their activities. Similarly, governments issue bonds, referred to as Treasury bonds, to raise funds. Municipalities also issue bonds for the same reason, which are known as municipal bonds. Moreover, the fixed income class is one of the safer investments after cash. Also, some bonds can be attractive for conservative investing.
Alternative classes like real estate carry more risk than both cash and fixed income investments. Thus, investors in this class expect higher returns. The alternative class is also home to commodities. These include crude oil, heating oil, natural gas, copper, wheat, soybeans and precious metals, such as gold and silver. Commodities can be very risky investments; therefore, this class is normally shun by most risk-averse investors.
Out of all the investment asset classes, equities are considered to be the most risky, and accordingly they have the potential for the highest returns. In this class, large caps are stocks of large publicly traded firms with a cap of more than $10,000,000,000 US Dollars (USD). Mid caps are basically medium-sized firms with a cap between $2,000,000,000 and $10,000,000,000 USD. Small caps have a cap under $2,000,000,000 USD. It is important to note that cap is short for capitalization, which is calculated by multiplying the current stock price by the total number of outstanding stocks.
Moreover, there is the emerging market subclass in the equities class. This is comprised of stocks from companies in the developing nations. On a spectrum from safe to risky, emerging market stocks are considered to be on the risky end. Thus, when they perform well they can generate substantial returns.
Furthermore, understanding the characteristics of the different investment asset classes may be beneficial for portfolio management. That is why portfolio managers aim to combine the right mix of assets in a portfolio to produce the best results. At the same time, risk can be substantially reduced through a proper mix of assets.