What are investment assets and what types of assets can I invest in?

Investment assets are instruments – tangible or intangible – that are held for the purpose of producing income or an increase in value. Investment assets can be grouped into classes that share similar characteristics. In this article, we’ll highlight some of the most common asset classes and show you how understanding their characteristics can help you as an investor.

The four main financial asset classes are cash, fixed-income securities, equities and derivatives. Other notable asset classes include commodities, real estate and cryptocurrencies, among others. Then there are alternative investment asset classes, like artwork, fine wine, vintage cars, stamps, antique jewelry and other collectibles. Remember when a pearl and diamond pendant that belonged to French Queen Marie Antoinette was sold for a record $36 million at a Sotheby's auction in 2018?

What are the main asset classes?
Why is it important to understand asset classes?

Understanding asset classes can help you determine the optimal asset allocation of your portfolio. The performance of different asset classes is usually not correlated, or sometimes even inversely correlated, so having multiple asset classes in your portfolio is a good way to diversify. For example, real estate and gold may perform well during a bear market for stocks in an economic downturn. Spreading your investments across different asset classes may therefore help you reduce your risk exposure.

If you prefer investing in a single asset class, understand how your chosen assets stack up against each other and learn about further sub-classifications that may help you hedge your investments.

Assets within each asset class will, of course, differ vastly. However, there are some general characteristics that can help you understand:

  • what the asset derives its value from
  • the expected risk/return profile of the asset
  • the liquidity of the asset (meaning how quickly you can convert your asset into cash)
  • how general economic conditions may affect the performance of the asset

What are the main asset classes?
The main financial asset classes

There are four main financial asset classes:

 

Every asset class has its own distinct characteristics and risk/return profile.

Comparison of the four main financial asset classes
  Value proposition Risk/Return profile Investment goals Liquidity
Cash, cash equivalents safety, liquidity low risks, low returns capital preservation highest
Fixed income securities offers a regular cash flow low risks (but credit risk exposure), modest returns steady income flow, capital preservation, liquidity high
Equities ownership rights in companies higher risk, dividend income and potential for capital growth capital gains, dividend income medium
Derivatives, options, futures, CFDs financial instruments based on an underlying asset high risk, high returns speculation medium

 

What are the main asset classes?
The difference between financial and physical assets

One way to categorize assets is to see whether the asset derives its value from a physical asset or from a contractual claim. If its value comes from the latter, the asset would be considered a financial asset. Some of the most common financial assets include securities (such as stocks or bonds), currencies and contracts (such as CFDs).

Physical assets include commodities and real estate. However, the word “physical” can be misleading, because investing in physical assets doesn’t necessarily mean you actually possess these objects or materials. Instead, these assets are usually "securitized", allowing you to invest in them indirectly.

For example, you can buy gold as an exchange-traded commodity (ETC) or via an exchange-traded fund (ETF). These offer much better liquidity for the retail investor than holding the assets directly. However, you should not lose sight of the potential risks of underlying assets. The fact that an asset is physical doesn't mean its value can't fall rapidly. For example, in April 2020, the price of crude oil briefly turned to negative as oversupply created storage issues.

Learn more about how you can invest in precious metals here:

What are the main asset classes?
Bottom Line

As you can see, a wide range of investment opportunities exist beyond investing in publicly traded stocks. It's important to understand asset classes, as each class responds differently to economic and market events. As a general rule, it's always a good idea to build a portfolio consisting of different asset classes, in order to minimize your risk exposure and maximize your returns.

How can you find the right mix of asset classes? First, set your investment goals and determine your risk tolerance. Once you have settled on an asset class mix, you can start picking individual assets.

What else do you need to know about assets and asset classes? 

If you would like to deepen your knowledge, check out these articles:

Author of this article

Gabriella Lovas

Author of this article

Gabi loves writing new content, be it a broker review, an article on investing or a blog post. She enjoys every step of the writing process, from doing the research to editing. Working remotely from Barcelona as a content editor is both exciting and challenging for her.

Gabriella Lovas

Content Editor

Gabi loves writing new content, be it a broker review, an article on investing or a blog post. She enjoys every step of the writing process, from doing the research to editing. Working remotely from Barcelona as a content editor is both exciting and challenging for her.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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