An asset class is an investment group that exhibits similar characteristics and is subject to the same laws and regulations. Asset classes are composed of instruments that on the marketplace often behave similarly to each other.
The three primary asset groups have equities (stocks), fixed income (bonds), and cash equivalent or money market instruments.
To the asset class mix, most investment professionals currently add real estate, commodities, options, other financial instruments, and even cryptocurrencies. Investment assets include both tangible and intangible instruments that investors buy and sell on a short- or long-term basis for the purpose of producing additional income.
Understanding Asset Classes
Simply put, it is a grouping of comparable financial securities. For example, IBM, MSFT, AAPL are a grouping of stocks. Asset classes and asset class categories often mix.
There is usually very little correlation and in some cases a negative correlation, between different asset classes. This characteristic is integral to the field of investing.
Financial advisors define investment instruments as types of assets that are used for diversification purposes.
Each asset class sometimes represents various characteristics of risk. And also, return investment and perform differently in any given market environment.
Investors interested in optimizing return often do so by reducing portfolio risk by diversification of asset classes.
Financial consultants focus on a class of assets as a way to help investors diversify their investments. Different asset groups have different types of cash flows, and varying risk rates. Investing in many different asset groups means that investment options have a certain degree of variety. Diversification decreases risk and increases the chance of returning.
Asset Class and Investing Strategy
Investors looking for alpha employ investment strategies focused on achieving alpha returns. Then, the tidy of investment strategies is to growth, value, income, or a variety of other factors.
In addition, it helps to identify and categorize investment options according to a specific set of criteria.
Some analysts link criteria to performance and/or valuation metrics such as earnings-per-share growth (EPS) or the price-to-earnings (P/E) ratio.
Other analysts are less concerned with performance and more concerned with the asset type or class.
An investment in a particular asset class is an investment in an asset that exhibits a certain set of characteristics. As a result, investments in the same asset class tend to have similar cash flows.
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