What image comes to mind when you think of an "investor"? Chances are, it'd be a well-heeled person in a crisp three-piece suit, clutching the newspaper and ready to talk "finance".
The reality of it is quite different! Before the blog dives more into financial topics, I thought it best to build a solid foundation of the key financial terminology you might come across later. This article isn't going to turn you into the Wolf of Wall Street, but will give you a better understanding of the basic financial concepts in a way that is easy to digest.
So, let's talk "finance"!
What is an Asset Class?
An asset class is a grouping of financial assets that exhibit similar characteristics and are subject to the same laws and regulations. Thus, asset classes are made up of instruments that often behave similarly to one another in the financial marketplace.
There are four main asset class categories:
Equity
Fixed Interest
Cash
Property
So, let's get to know them a bit better.
1) Equities
Equities (also known as 'ordinary share' or 'shares') represent a share in the ownership of a publicly-owned business. Their value fluctuates with investors' perceptions of the company's performance.
They have the potential to make you money in two ways:
You can receive capital growth through increases in the share price
You can receive income in the form of dividends, which is a share of the company's profit relative to the shares you own.
Unfortunately, neither is guaranteed and there is a risk that the share price will fall below the level at which you invested.
Historically, this asset class provides the highest returns over the long term, keeping pace with inflation and providing some extra returns in particularly good years. If you choose the company correctly, you can receive high dividends. If sustainable, they are a good match for known income needs.
On the other side of the coin, equity prices are volatile - with their price going up and down by significant amounts depending on market conditions. An example is how the share prices of companies in the tourism and hospitality industry reached an all-time low in 2020 due to travel restrictions caused by the COVID-19 pandemic.
2) Fixed Interest
The idea of an individual lending money to a major corporation or a government may initially seem bizarre, but that's exactly what fixed interest is.
The easiest way to think of fixed interest is as a loan. They are typically issued by companies and governments as a way of raising capital, and providing the buyer with a regular stream of income over a specific period, with a promise to return investors their money on a set date in the future. An example of these are bonds and annuities.
Fixed interest is a relatively stable and lower risk asset class as compared to equities but usually deliver lower returns in the long term.
An important thing to note is that the value of fixed interests is sensitive to changes in the interest rate.
3) Cash
"Cash is king" is a phrase you have most likely heard utter at some point, and there is some truth to that statement.
Cash includes idle money, the money in your bank account, saving account, the money in your pocket or hidden under the pillow (don't worry, I won't tell anyone).
Generally, cash gives you the freedom to buy anything instantaneously since it is regarded as liquid, meaning it is more easily accessible.
A cash investment tends to be seen as a lower risk and lower reward than equities and fixed interest. It can be a useful tool for risk-averse investors or as a temporary home for money in-between longer-term decisions.
The strategy for using cash funds is to achieve a competitive rate of return whilst maintaining safety and liquidity for the investor. As you'd imagine, this is not ideal for an investor looking for longer-term capital growth.
4) Property
Property as an asset class falls under the larger umbrella class called "Alternative Investments", comprising of assets outside of the traditional stocks and bonds. Alternative Investments is a complex class and would be better tackled in its own article; so for simplicity, this post will only focus on Property.
Invested real estate refers to properties that generate income for the buyer pr are purchased with profit in mind, rather than as a place for the buyer to live.
There are two main ways a buyer makes money with investment properties:
Receiving lease or rental income from tenants using the property
When the property increases in value either through selling it for a capital gain or using the built-up equity to purchase additional properties.
Investment properties, like other investments, carry specific risks and rewards.
Properties as an asset class can yield high returns and are useful for diversification of investment portfolios, but are largely considered high-risk, especially in developing countries.
Barriers to investing include a high initial cost, lack of transparency, underdeveloped markets, and low liquidity. As you'd imagine, it's harder to sell a house than it is to sell your shares.
Growing trends in the investment property market show momentum into more nontraditional assets such as student accommodations and data centres, but more on that later.
Closing
The article explored the main investment asset classes and gave a brief description of each one. This will form a foundation for the content to follow, and will give you something to talk about the next time someone wants to talk "finance".
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