Aug 01 (newsonjapan.com) - When dealing with investments, it's essential to understand the different asset classes and which investments fall into each.
An asset class is a collection of investments that share similarities—including how they behave in the marketplace, the purchasing process, and how the government regulates them. Historically, there have been three primary asset classes, but today financial professionals generally agree that there are four broad classes of assets:
- Equities (stocks)
- Fixed-income and debt (bonds)
- Options
- Real estate and tangible assets
If your portfolio includes investments spread across the four asset classes, it's considered balanced—which is ideal because it helps to reduce risk while maximizing return. If your portfolio is heavily concentrated in a limited number of sectors and those sectors underperform, your portfolio will take a large hit.
If, though, your portfolio is well-diversified and few asset classes experience difficulties, this won't impact the entire thing. You'll still have other assets performing adequately enough to alleviate the decline in value. This kind of diversification is key to protecting your portfolio.
Equities
Equity represents ownership. When you purchase shares in a company, you're purchasing ownership in that company. For example, if Company ABC has 100,000 shares and you buy 1,000, you will own 1% of Company ABC. As part-owner, you have rights to a portion of a company's profits, and these are usually paid out to investors in the form of a dividend. The dividend amount varies by company, and some companies may choose to use the dividends to reinvest back into the company for growth.
Although stocks are lumped together, the same investing principles should not apply to them as a whole. For example, investing in a hyper-growth startup is very different from investing in a blue-chip stock that's been around for decades.
Differences in sectors can also influence the behavior of stocks. Defensive stocks, such as stock of food companies and utilities, are goods that people always need and thus always buy. By contrast, cyclical stocks, such as luxury goods companies, tend to perform better during a strong economy when consumers have extra cash to spend. As a result, these two stock types behave differently, which will in turn impact your investing strategy.
Fixed-Income and Debt
Whenever you purchase an institution's bonds, you're essentially lending them money—which is why they represent debt. In return for this loan, the institution promises to pay interest on the loan in the form of periodic payments. These interest payments are paid to bondholders throughout the life of the bond, and the principal is returned at the end of the term (referred to as the maturity date). For example, if you buy a $1,000 5-year bond with an annual interest rate of 2%, you'll receive biannual payments of $10.
Options
When you trade options, you purchase or sell an underlying asset at a predetermined price by a specific date in the future.
Stock option trading is considerably more complicated than stock trading. When you buy a stock, all you have to do is specify how many shares you want, and your broker will complete your order at the current market price or a price limit you choose. Options trading necessitates a thorough grasp of sophisticated tactics, and the procedure of creating an options trading account is more involved than that of opening a traditional investing account.
Some traders who have enough expertise with options trading may desire to go into more complicated investments like binary options trading.
The notion of a Binary Option is based on the outcome or outcome of a "Yes" or "No" proposition. It establishes a preset payment as well as a loss amount. The payment is set in this case.
It's a good idea to learn more about binary options trading before making a high-risk investment like this. Otherwise, you risk losing all of your money in a matter of minutes. More technical binary trading information can be beneficial for investors who want to trade in binary options.
Real Estate and Tangible Assets
Tangible assets—ones you can physically see and touch—are grouped into their own asset class. Real estate is the most common type of tangible asset that people own, but commodities, like gold and livestock, also fall into this category. Generally, these types of assets can withstand periods of inflation.
Source: newsonjapan.com
