Asset classes definition
The various types of financial instruments are called asset classes, and they come under four broad categories. Asset classes are defined by the similar characteristics of the instruments within them, such as behaviour on the market, laws and regulations.
Types of asset class
The traditional four types of asset class are:
- Equities (or stocks): the shares that make up the ownership of public companies.
- Fixed income: investments that pay interest over time, then return the original sum paid. Bonds are the most common form of fixed income asset.
- Money market: cash and its equivalents, very liquid but without much room for growth. Currencies are included in this class.
- Alternative investments: some very popular markets are classed as alternative investments. Property and commodities feature here, though many investors would put them in their own asset class.
To prevent the risk associated with investing in one section of the market, many investment strategies recommend spreading trades out across many or all of the above asset classes. This is referred to as diversification (or diversifying).