With different risk profiles and rates of return, it’s a good idea to get to know the different types of asset classes before you start to build your investment portfolio. From shares and ETFs to cash and bonds, here are some key asset classes every investor should know!
What are financial assets
Financial assets are the different things you can invest in. When you start investing, you might find that you prefer some assets over others because of their exposure to risk or their historical returns. So, it’s important to do your research before you start investing to make sure you fully understand how that asset works and its potential risk and return.
Financial asset examples
Here are some examples of financial assets you might come across on your investing journey:
- Exchange traded funds (ETFs)
Shares (also known as stocks or equities) give you a slice of ownership in a company. 🍰 When you buy a company’s stock, you’ll be able to enjoy that company’s success, or share in its failure. In some cases, you could also be entitled to receive voting rights and a split of the company’s profit (known as a dividend).
Shares are usually classed as a long-term investment because the best returns are achieved by holding onto them for a number of years. As well as buying shares in individual companies outright, you could also buy shares (sometimes called ‘units’) in a tracker fund – which will offer broader exposure to the stock market. These are the types of funds we offer at Moneybox and we’ll go into more detail about tracker funds and their benefits in Lesson 4.
Exchange traded funds (ETFs) are funds that try to mirror the market performance of a collection of different assets. You can buy and sell shares in ETFs on stock exchanges, and they are often set up to follow the performance of different sectors, countries, or the global economy. 🌍
Buying shares in an ETF is sometimes considered less risky compared to buying shares in individual companies because the value of an ETF is tied to a group of assets, rather than a single asset’s market performance.
Cash assets include the money in your pocket, the money in your bank or savings accounts, the balance of your Cash ISA, and premium bonds. While cash has a higher inflation risk than other assets, it’s one of the most easily accessible – so it’s important to keep some of your money in cash for everyday spending and as emergency savings. 💰
Many people think of cash as the safest place to store their money, but that’s not necessarily true. If inflation is rising, one of the worst places to have your savings is parked in cash because its purchasing power will be reduced year-on-year. This is why some people will choose to invest their spare cash into the stock market – which generally offers better returns and gives you more protection against inflation.
Bonds (also known as fixed-income securities) are effectively an ‘I owe you’. 🤝 You’d buy a bond with the expectation that you’ll receive an interest payment on the bond at set intervals (often annually), plus you’ll get the full amount that you paid to buy the bond back when it expires. There are three main types of bond: government, municipal and corporate.
The interest payment for bonds is known as the ‘coupon’, and the expiry is called the ‘maturity’. So – as an example – if you bought a £500 UK government bond with a 5% coupon and a 10-year maturity, you’d give the government £500 and in return you’d receive a fixed income of £25 a year for 10 years, as well as your initial £500 back in the final year – when the bond hits its maturity.
Property includes your house, a holiday home, corporate office space or a buy-to-let. 🏘️ Getting started in property requires a lot of initial money – especially when compared to other assets like shares.
Because of this, a good way to get exposure to the property market without having to buy any property yourself is through property investment funds or real estate investment trusts (REITs). Your investment will be pooled with other investors’ money, and the fund will invest in properties to give you exposure to the sector as a whole.
Commodities are raw materials like gold, silver, oil and natural gas – and they can be broken down into two categories:
- Hard commodities like gold, silver, oil – anything that has to be mined or extracted from the Earth. 🛢️
- Soft commodities like wheat, orange juice, lean hogs – anything that’s classed as an agricultural product or livestock. 🐖
One of the most volatile and risky assets out there, crypto is infamous for its sharp and sometimes seemingly irrational price movements. Bitcoin is the most well-known coin, but there are lots of alternative coins – sometimes known as altcoins – out there too.
Crypto is a decentralised, electronic currency – meaning that it isn’t regulated by any central banks. Instead, new cryptocurrency like bitcoin is released into circulation as a reward for solving complex mathematical problems and encryptions with powerful computers.
Why are asset types important?
Asset types are important because they each have different risk profiles and offer various rates of return. For example, stocks are more risky than cash or bonds – but they usually offer better returns over the long term and are better at protecting you from rising inflation levels.
At Moneybox, you can get exposure to a range of assets through our simple Starting Options, or build your own portfolio by choosing your preferred range of tracker funds.
Question one: What does ETF stand for?
- Exchange transacted fund
- Exchange traded fund
- Equity trust fund
Question two: What are the three main types of bond?
- Government, municipal, corporate
- Major, minor, exotic
- Defensive, cyclical, growth
Question three: Which of these assets is the riskiest but also offers the best return over time?
You’ll find the answers to the quiz below.
🎓 Next up, we’ll look at tracker funds – including how they work and their benefits for investors.
Question one: Exchange traded fund
Question two: Government, municipal, corporate
Question three: Stocks
All investing should be regarded as long term (minimum five years) and historic performance isn’t a guarantee of future returns. The value of your investments can go up and down, and you may get back less than you invest. We don’t provide investing advice, and investors should make their own investment decisions or contact an independent adviser.