Before you start investing your money, it is critical to gain a broad understanding of the different types of investments you can make and how they relate to each other.
An asset class is simply a grouping of similar types of investments. Understanding what to expect from each asset class helps you make appropriate investment decisions based on your varying needs and time frames. Financial theory suggests that by investing in more than one asset class investors can diversify their investments and reduce risk while maintaining an overall target return.
There are four main asset classes:
Shares are issued by a company to raise money. Investors buy shares, which can be traded on the stock market. They are considered one of the best investments to achieve good long-term returns, but can be quite volatile in the short term.
Bonds are taken out by a company or a government over a fixed amount of time in return for a fixed interest rate as well as the return of the original capital.
Commercial properties, such as offices and warehouses, which are bought.
Cash is the most familiar form of investment for most people. From an investment perspective, cash can mean several things including money in your bank account, money in a fixed deposit account or an investment in a unit trust money market fund. All these have cash as their underlying source.