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Asset classes are the various types of investments that you can place your money in.
There are many different asset classes to choose from, all with different risks and rates of return, which is why it’s important for investors to be informed about their options.
While there are a few main asset classes, each of these can be broken down into more categories.
Because of this, I created this post that covers all the major asset classes you need to know as an investor.
Table of Contents
The Major Asset Classes You Need To Know
Three Main Asset Classes
There are 3 primary asset class categories you probably have heard of.
Stocks, or equities, are shares of a publicly traded company.
When you buy shares, you become an owner in the business.
If the stock pays dividends, you as a shareholder are entitled to receive the dividend.
This asset class is the riskiest of the three.
Bonds, or fixed income investments, are debt instruments companies and governments use to help finance growth or other projects.
The bond is an IOU promising the bondholder will be paid back their investment plus interest over a set period of time.
The interest rate you earn from a bond is stated at the time of purchase and does not change.
As the bondholder, you receive interest payments twice a year in most cases.
This asset class carries less risk than stocks, but more risk than cash.
Cash is simply money you have available to invest.
It is sometimes called cash equivalents, cash investments, or money market funds.
Most times this cash sits in a money market account so it can earn interest as it sits.
Many people keep a percentage of their portfolio in cash in case they need the money to buy an investment, to take advantage of a market decline, or even to keep for safekeeping.
While there is little to no risk of losing money when it sits in cash, making it the safest option of the three, it does lose purchasing power because of inflation.
- Read now: See how inflation destroys your wealth
Breaking Down The Investment Classes
While these are the 3 most common types of asset classes, they all can be broken down into more investment categories.
The biggest is the various stock classifications.
When it comes to stock classifications, they are broken down by a few simple metrics.
The first is market cap or market capitalization.
This is another way of saying how big a company is and is determined by multiplying their share price by the total number of outstanding shares.
There are six main market cap sizes:
- Mega cap companies: Over $200 billion
- Large cap companies: $10 billion to $200 billion
- Mid cap companies: $2 billion to $10 billion
- Small cap companies: $300 million to $2 billion
- Micro cap companies: $50 million to $300 million
- Nano cap companies: Under $50 million
The second type of stock classification is by type, growth or value.
Growth stocks are companies that are expected to outperform the market as a whole due to their growth.
This could be due to a variety of factors, including valuable product lines, new companies quickly growing, and more.
Value stocks are companies that are currently undervalued in terms of share price.
They are trading below what they are actually worth and should provide higher returns.
All stocks can be value or growth.
For example, you have both large cap growth stocks and large cap value stocks.
You also have small cap growth stocks and small cap value stocks.
- Read now: Click here to see the pros and cons of large cap stocks
- Read now: Learn the pros and cons of small cap stocks
The only exception to this is with micro cap and nano cap companies.
These only tend to be growth stocks because the companies are so small and are growing.
If you are a mutual fund or exchange traded fund investor, you do have the option to invest in both growth and value stocks at the same time.
These are typically called blend or blended funds.
Additional Stock Classifications
While those are the biggest stock classifications, there are more that investors use.
Here are the common ones you will come across.
Blue Chip Stocks
These are large cap companies and mega cap companies that have a solid history of producing earnings.
Investors trust these stocks and they tend to carry less risk than the market as a whole.
They also tend to pay dividends because they are stable, mature companies without a lot of growth potential.
These are companies that have a lot of growth potential, but very little track record.
They also tend to carry more risk because they could go under at any time and you lose your investment.
Because of the higher risk, you could experience large, fast gains on your investment.
But because they are so risky, you should only invest a very small amount of money, if any at all, in these companies.
These are related to speculative stocks in that they are risky, but they tend to be even more risky.
A penny stock is defined as a stock that trades for under $1.
They have very little information on them and very few, if any, analysts covering them.
This opens the door for a lot of misinformation and stock price manipulation, or pump and dump scenarios.
This is where an unknown actor will hype a stock to get others to buy in.
The increase in demand will drive up the price and then the original actor will sell for a gain.
The stock then drops back down to its usual trading price.
These are stocks that tend to fluctuate with the economy.
They have a direct correlation between their performance and economic indicators such as GDP growth, employment rates, unemployment rate changes, inflation rate changes and more.
They carry risk because if the stock market drops during an economic downturn then cyclical stocks will also drop in value.
In most cases, the stocks that are cyclical in nature tend to be consumer discretionary.
These are companies that sell goods that people but a lot of when the economy is going well but don’t buy a lot of when the economy is bad.
Interest Rate Sensitive Stocks
These are stocks that tend to move with the interest rates.
Changes in interest rates will impact certain companies more and these stocks can either gain or lose value depending on what happens to those changes.
For example, banks are very sensitive to interest rates.
Low interest rates means they earn less money on the loans they close on, while higher interest rates mean more money they earn on loans.
Rising interest rates means they have to pay higher rates to depositors as well.
Another company affected by interest rates are those with a lot of debt.
If they need financing, higher rates means it costs more money to borrow.
On the flip side, lower rates could allow them to take out a new loan at a lower rate to pay off a higher rate loan, saving them millions of dollars in interest.
These are companies who pay dividends on a regular basis.
You might hear them referred to as income stocks as well, because you earn an income from the quarterly dividends.
As mentioned above, more mature companies tend to pay dividends.
- Read now: Learn the pros and cons of dividend stocks
- Read now: Here is how to get started with dividend investing
This is because they do not need to reinvest all of their profits back into the business to keep it growing.
Growth stocks rarely pay a dividend for this reason.
They want to keep the money in house so they can keep growing the business.
When it comes to dividend amount, most pay between 1% and 5%.
The higher the dividend rate, the more income you can expect to receive, but this isn’t always the case.
If you are a dividend investor, you want to look for companies that have a long history of paying a dividend and raising the amount of the dividend.
The best of breed here are the dividend aristocrats.
This asset class is made up of companies that are located in foreign countries.
They too are broken down based on market capitalization, as well as growth and value.
They have a higher risk than domestic stocks because of political risk, currency exchange risks, and more.
Emerging Markets Stocks
These are stocks that are located in other countries, mostly in developing countries.
China, Brazil, and India tend to be the most popular places but other countries are included as well.
These stocks tend to have a lot of market volatility associated with them because of their small size and they are regulated outside the United States.
Fixed Income Asset Class
Bonds also have various underlying types as well.
U.S. government bonds are seen as the bonds with the lowest level of risk because they are backed by the United States Government.
These bonds have various terms for when they mature, anywhere from a few months up to 30 years.
For bonds that mature in 1-2 years, they are considered short term bonds.
Bonds that mature in 3-7 years are considered intermediate term bonds.
And bonds that have a longer term, over 7 years, are considered long term bonds.
Local governments also issue bonds.
These are known as municipal bonds.
Government bonds issued by foreign countries are known as international bonds.
In addition to the government, there are corporate bonds.
These all tend to have the same time to maturity.
But depending on the credit rating of the company, the interest rate will vary.
This is known as credit risk.
The higher the risk, the higher yield the bond will pay.
To make investing in bonds easier for investors, you can invest in bond funds offered by mutual funds and ETF companies.
Additional Investment Classes
If you have invested any money, you know that in addition to stocks, bonds, and cash, there are other ways to invest your money.
For the most part, these are considered alternative investments or alternative assets, simply because they are an alternative to investing in the stock market through stocks, mutual funds or exchange traded funds.
They are popular investment vehicles because many have a low correlation or negative correlation with the stock market.
This simply means that they don’t tend to move in the same direction as the stock market.
If the market drops, these various asset classes tend to hold their value.
Here are the other asset classes that you can invest in.
This is the broad term that covers all types of property, including commercial and residential.
When you invest in real estate, there are different ways to do it as well.
You can buy a rental property where your tenants pay off your mortgage for you or you can purchase an equity-based investment like real estate investment trust or REITs.
REITs are one of the best ways to invest in real estate because they allow you diversify your investments, which means that if any single property goes bad it won’t have a large impact on your total investment.
A new trend in real estate investing is crowdfunding.
Here you invest a small amount of money into a property and get a share of the capital gain and income that it produces.
One of the most unique in this industry is Arrived Homes.
You can invest in single family homes throughout the country for very little money.
Click the link to learn more.
Commodities are physical goods that are traded between investors.
Common types of commodities include grain, coffee, beef, oil, natural gas, and orange juice.
Precious metals, like gold, silver, and platinum are also commodities, though many investors think they are their own asset class.
The reason people invest in this asset class is because traditionally, commodities move in the opposite direction of stocks.
So when stocks drop in value, commodities tend to rise.
Therefore, they are a good asset to own during times of wild market conditions.
Understand that it is not 100% of the time they move in opposing directions.
But generally speaking, they do.
The easiest way to invest in this asset class is to buy a mutual fund or exchange traded fund that invest in these asset types.
Another way to gain access to them is through a futures contract.
This is a more advanced investing strategy than I cover in this post.
Another asset class is collectibles.
This includes art, wine, stamps and coins.
This alternative investment is another way to diversify your portfolio.
As with commodities, collectibles don’t move with the market, therefore they are a good way to protect your wealth if the market is volatile.
However, the market for collectibles isn’t as large.
This means it is an illiquid investment, and investors can have a harder time selling.
In order to invest in these, you need to buy the physical asset.
There are very few options to invest otherwise.
Currency investors are people who want to protect the value of their home country’s currency.
Other currency investors are multi-national corporations.
Since they do business internationally and in foreign currencies, they use this investment to protect against inflation.
The goal of this investment isn’t to get a large return, but rather limit the possibility of losing a lot of money because of currency fluctuations.
Thus, a lower return is acceptable with this asset class.
Most currency investing is done through futures contracts.
Cryptocurrency is a digital currency that exists in an encrypted, decentralized format.
It is a new asset class that isn’t well regulated at this point and as a result, there aren’t really any laws governing it and many people use cryptocurrency to transact anonymously.
Bitcoin is the most popular form of this asset class but Ethereum and Litecoin are gaining steam as well.
This is a newer type of investment and comes with a lot of volatility.
However, it is becoming more mainstream and both individual investors and institutional investors are getting on board.
A hedge fund has similar characteristics of an active management mutual fund.
They both have portfolio managers looking to earn maximum returns.
A hedge fund forms a partnership and uses pooled money to invest in various types of assets.
Where they begin to differ from a mutual fund is a hedge fund will employ many different strategies to earn higher than usual returns.
Unlike mutual funds, they can invest in things like financial derivatives, currencies, and other assets.
- Read now: Learn the basics of mutual funds
In order to invest in a hedge fund, you need to have a net worth of $1 million or more, or have an annual income of $200,00 or more for the last 2 years.
Viewers of Shark Tank are familiar with venture capital or private equity.
It is the act of buying into small businesses and earning a share of the profits.
You can look at it in a very similar way to investing in stocks.
The main difference is these companies are not publicly traded on an exchange.
In the past, you needed to have a lot of money to be a venture capitalist.
But new investing platforms are allowing small investors to join in.
They work by pooling money from various investors to buy into these companies.
Structured products are financial instruments that pay out to the investor over time.
In other words, it’s an investment instrument where you receive a guaranteed return for your money.
They’re often complex and hard to understand as well as risky investments because they don’t have much transparency into what is being invested in or who is investing in them.
They can offer very high returns, but like most investments that offer a high return, it comes with high risk.
Frequently Asked Questions
There are a lot of questions I get about asset classes.
Here are the most common ones.
Do I need to invest in all the asset class categories?
Most investors can have a diversified investment portfolio only investing in stocks and bonds.
You don’t need to have such investments like precious metals or collectibles in your portfolio.
By keeping investing simple and sticking to the basics, you can build wealth in the stock market.
Is it smart to invest in a single asset class?
For most investors, the answer is no, because their risk tolerance would not allow for this.
With that said, there are some investors who could simply invest in a total stock market fund only.
The bottom line is you need to know your investment objectives and goals and invest based on that.
- Read now: Find out what your risk tolerance is
- Read now: Here is a beginners guide to asset allocation
What is the best way to invest in corporate and government bonds?
The easiest way to invest in these debt securities is through a mutual fund or ETF.
You can choose to invest in a total bond market fund or pick funds based on time to maturity, like short term bonds.
In most cases, the shorter the time to maturity, the lower the interest rate you will receive.
This isn’t to say you should invest in long term bonds to earn a higher return.
Long term bonds are much more sensitive to changing rates and can fall in value more than short term bonds.
There are the major asset classes you need to know as an investor.
For most investors, knowing the basic classes and their categories is enough.
While some might venture into some of the alternative investments like commodities and real estate, the others are not required for investing success.
The ultimate factors for successful investing are picking the right asset allocation for your risk tolerance, having a diversified portfolio, investing in low cost investments, and investing for the long term.
If you can do these things, you will be a successful investor and grow your wealth.
- Read now: Learn the importance of a diversified portfolio
- Read now: Find out why buy and hold investing is the best strategy
- Read now: See the difference between market timing vs. time in the market
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.