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Defining Investments: The 5 Asset Classes

Let’s discuss the different types of assets you can invest in. The 5 different asset classes are stocks, bonds, cash, real assets, and alternatives. In today’s article, I’ll briefly discuss each of these. In the near future, I’ll dedicate an entire article to each asset class where I go into further detail.

The first and most common asset class is the equities asset class, more commonly referred to as “stocks”. Stocks are small pieces of companies that the company allows the public to purchase. Each piece of a company is divided into smaller pieces called shares. When you buy shares in a company, you own an extremely small piece of that company. You can invest in many different kinds of stocks, from Apple to Corsair, to Chipotle. Stocks usually rise when a company does well or is expected to do well, and stock prices fall when the opposite occurs. When you invest in a company’s stock, you believe the company itself will be profitable.

Stocks and shares are exchanged through the stock market. Investing in the stock market is generally considered to be safe, and investments in the overall market through Index funds have proven to be consistently profitable. The stock market rises when the majority of individual stocks are doing well. Individual stocks do well when their company is doing well, which is generally due to some kind of innovation. Innovation increases over time, which is why technology today is so drastically different from technology 50 years ago. This is why the stock market has risen throughout history. You can find more information on stocks in this article.

Bonds, also called fixed-income securities, are generally related to debt. When you purchase a bond, you are essentially loaning a government or corporation money. They pay you back interest on that loan. That interest is the way you make money by investing in bonds. Bonds are considered the lowest-risk investments, but also provide the lowest returns/profit.

The third asset class is cash and cash equivalents. This class is simply cash or anything that can quickly be converted to cash/spendable money. Savings accounts, checking accounts, your PayPal/Cashapp balance, money market funds, and even bills in your wallet fall in this asset class. Cash is extremely important, as it's used in daily life. While the other asset classes are great to build financial stability, cash is the only class that is truly essential. It’s always a good idea to keep some on hand for emergencies.

Real assets are another key asset class. Anything that has physical value (something valuable that you can actually hold) falls under this asset class. The two main investments in this class are real estate (land, houses, condominiums, etc) and precious metals (gold, silver, etc). Assets in this class generally require more money to purchase and come with certain factors that add risk. Land, houses, and other similar investments are extremely expensive, come with a time frame of 15+ years, and come with unforeseen costs, like maintenance, insurance, and property taxes. Many people invest in this class unknowingly when purchasing their home or jewelry. Others invest in this class to generate passive income through rent, or to hedge against inflation (gold and other precious metals).

The last asset class is the most unconventional and typically the hardest to invest in. This is the alternative investment asset class, also known as “alternatives”. It includes private equity (investing in private businesses/companies), hedge funds (giving your money to a fund and having them invest it as they see fit), or venture capital (giving money to support new companies/technologies). Most people are unable to invest in this asset class due to the high risk, high cost of investment (the minimum investment amount in assets in this class are in the hundreds of thousands, if not millions of dollars), lack of liquidity (it's much more difficult to sell a piece of a business than an Apple share), and uncertainty in time frame and return on investment.

In short, each investable asset will fall under a category called an “asset class”. Each class has a few guiding details that dictate what investments qualify for it, and each class comes with its own risks and rewards. Some assets, like stocks or bonds, can easily be purchased. Other investments, like real estate or private businesses, are much more difficult to invest in. When selecting which asset to purchase, a variety of factors need to be examined. Ensure the asset you’re purchasing fits your timeline, risk profile, and financial goals. Happy investing!

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