Posted by What Is an Asset Class?
Financial instruments that exhibit similar characteristics and are subject to identical regulatory requirements are defined as belonging to a particular asset class. These instruments will often mimic each other’s behavior in the marketplace. While they most likely will not be identical, there will be a high degree of positive correlation among these instruments.
Equities
The asset class known as equities refers to stocks. Stocks represent ownership interest in a publicly traded company. The higher the number of stocks that one owns, the higher one has ownership stake in the company. This entitles the stockholder (also known as a shareholder) to their proportion of the company’s assets and profits. This asset class is quite popular with investors, as it has a track record of generating value over time.
Options and Futures
Option and futures contracts are similar in certain ways. The main way is that they offer individuals a process to hedge the risk posed by other asset classes in their portfolio.
Options give the holder the right, but not the obligation, to buy or sell a specified amount of the underlying asset at the contracted-upon price before an agreed-upon date. For example, an investor with exposure to equities could use options to hedge against losses.
A futures contract, on the other hand, requires the buyer to purchase the underlying asset at the set price, regardless of the current market price at the expiration date. Conversely, the seller is obligated to supply the asset under the same terms. A futures contract may be used to hedge or speculate.
Bonds, Currency, Commodities, and Crypto
Bonds are debt securities that pay regular and stable interest, making them well-suited for investors seeking a regular income stream. Commodities are the raw material used in the production of a finished good.
There is much debate as to whether currency and cryptocurrency are asset classes. A nation’s currency is essentially a medium of exchange used to facilitate the buying and selling of goods between two parties. Cryptocurrency, or crypto for short, is a relatively new phenomenon that can best be described as a digital asset.
KEY TAKEAWAYS
- Equities add value to an investor portfolio if they appreciate in value and/or pay dividends.
- Futures and option contracts allow the investor to speculate on, or hedge against, the direction of the underlying asset.
- Bonds have different features from stocks, making them a good diversifier for investment portfolios.
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