Investing is the purchase of assets that increase in value over time and provide returns in the form of income payments or capital gains.
Major Asset Classes
Cash refers to money deposited in a bank account. This asset class is the safest type of investment, and investors know precisely what interest they will earn on their capital. This type of investment guarantees that you will get your capital back.
Bonds: typically, a debt instrument whereby a loan is made by the investor to a borrower. The borrower will issue a fixed interest rate to the lender in exchange for the use of their funds. Bonds are typically issued by a corporation or government agency.
Mutual Funds involve a number of investors that pool their money together to buy securities. Thes funds are managed by portfolio managers. The portfolio managers will then use the pooled funds to purchase stocks, bonds and other securities.
Exchange-Traded Funds are similar to mutual funds however they are traded throughout the day on a stock exchange. The value of these investments can change drastically over the course of a day.
Stocks: Investors purchase shares of a company and have a claim to the company’s assets in the event of liquidation. The return from the investment is paid in the form of a dividend.
Alternative Investments include real estate, hedge funds, private equity funds and commodities.
Risk and Diversification
The level of risk is different for the different investment classes. By taking a higher risk, your investment returns may grow faster, but there is also a greater chance of losing capital. By taking less risk, you may earn profits at a slower rate, but your capital is safer.
One of the best ways to manage risk is to diversify your investment portfolio i.e., purchase a variety of different investments which carry different levels of risk. In this way you can buffer the losses from one type of asset with gains from another.
Melessia Naidoo
Head: Finance
References
“Investing for Beginners: A Guide to Assets.” Investopedia, 2024, www.investopedia.com/articles/basics/11/3-s-simple-investing.asp#toc-what-are-the-different-asset-classes. Accessed 27 Aug. 2024.
“What Is Investing? How Can You Start Investing? – Forbes Advisor.” Www.forbes.com, www.forbes.com/advisor/investing/what-is-investing.
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