An asset is a piece of property that can be sold for cash, or traded for another property of equal value. Properties with the same characteristics are put into the same asset class. Common asset classes include stocks, bonds, cash equivalents, and real estate.
Each asset class includes property that is bought and sold in the same way. The assets in each class also have the same guidelines or laws governing how they are traded, bought, or sold. Generally, assets in the same class also experience similar results in the marketplace. For example, when a stock market is said to be down, many individual stocks lose value.
Company shares sold on the open market or over the counter make up the stock asset class. Historically, stocks have experienced more volatility than other asset classes. Due to increased risk, returns can be higher than in other classes.
Debt instruments issued by companies, and federal and municipal governments, are included in the bond asset class. A company issues bonds to raise money. Investors purchase the bonds and earn a fixed interest rate.
Generally, bonds have less risk than stocks. It is still possible, however, for a bond issuer to lose money and default. A bond issuer is in default if it is unable to pay its bondholders.
Cash accounts or cash equivalents are usually provided to investors by banks, credit unions, and investment firms. Money market accounts are an example of this class. Investors earn interest similar to that of a savings account. The returns may be lower compared to the other assets classes since there much less risk involved in the cash equivalent asset class.
Buyers can invest in the real estate class by purchasing real property. They can also participate in this market by purchasing investments in other asset classes. Options include buying shares in a real estate exchange traded fund (EFT) and purchasing shares in a real estate company.
Many investors like to own a number of properties in each asset class. This tactic may help ensure diversification and positive investment performance. Using diversification, if one asset class is performing poorly in the current economic environment, the gains in the other asset classes may offset any loses.
Asset diversification can be accomplished by an individual purchasing property in the different classes. Either the investor or a professional advisor can make the decisions regarding which assets should be included in the investment portfolio. This method requires constant monitoring of the price fluctuations in each class.
Some investors may choose to purchase assets that include ready-made diversification. Mutual funds are an example of an asset that may include property in each asset class. A fund manager monitors the investments gains and losses in the fund to ensure that the overall portfolio maintains a solid mix of assets in each class. In return, investors pay a management fee when they own mutual fund shares.