In modern financial markets, everybody can choose any asset class they want to invest in or do day trading with. Learn more about asset classes and using a multi-asset trading platform.
What is an asset class?
An asset class is a way to group financial assets that have similar qualities. For example, among currencies there is the US dollar (USD) and Swiss franc (CHF), among commodities there is gold and oil and among equtiies there is Amazon stock and Tesla shares.
Asset classes for diversification
Asset classes are one of the first considerations for how to invest. The idea is to have an asset alocation strategy that puts a certain percentage of your funds into each asset class. This provides asset class diversification because each asset class behaves differently under different market conditions.
Most of the time there is little correlation, and even negative correlation between different asset classes. Portfolio managers use this information to create diversified portfolios that can surive in bull and bear markets.
What are the 3 asset classes?
The starting point for all investing are these three assets. For those perferring a very hands-off approach, there will probavly be little need to go much beyond these three for ways to store your money. All of which are very liquid and offer risk diversifcation, from cash investments, which are safest and offers lowest returns to stocks, which are risky but have historically offered the best long-term returns.
What are the 5 major asset classes?
Expanding on the main three, property and commodities might also be included into the asset class categories.
Commodities are very specualtive and tend to require expert knowlege, while property is an excellent addition to any portfolio, ioffering reliable income-earning and capital gains potential, but has higher barriers to entry and is more illiquid. For most investors, these five types of assets will make up the bulk of their long term portfolio.
- Stocks (equities)
- Bonds (fixed-income)
What are the 7 asset classes?
As you might be starting to realise, there is more than one way to slice a cake. Different investors split assets up into different classes, depending on their needs for a diversifed investment portfolio. Another classic way to seperate asset classes is as follows:
- Domestic Equities
- Global Equities
- Bond/Fixed Income
- Real Estate
Asset Allocation with FlowBank
FlowBank has the modern, well-informed digital customer in mind, when offering eight asset classes, as well as cash deposits to create the ideal asset allocation portfolio, all in a smartphone app or on your desktop computer.
Investing in Stocks
Also called equities, stocks are cash flow producing entities, a business, that generate value over time, and that are listed on a public stock exchange like the London Stock Exchange.
A companies issues shares of stock in the company. Each share is a contract of ownership in a fraction of a company’s business. Public markets are great in that anybody can become part owner of a company. Some famous companies like IKEA are not tradeable on an exchange because they are not public companies. Private companies like IKEA may become public companies after filing for an initial public offering, and companies that are already public like Tesla, may become private once again. Within this asset class, there are sub categories of stocks like blue chips firms and small caps.
Fixed Income investing
Fixed income means an income that is recurring over time. ‘’Fixed’’ refers to a pre-set periodic payment and ‘’income’’ means revenue. The concept is simple; lend your money to a business or government in return for periodic interest payments.
Money has a price because a dollar today could be used to finance many projects that could grow tomorrow. Tomorrow, your $1 dollar invested could be $2 dollars if that project grows so if you lend your money, you would like to be paid for its use.
Enter ‘’Bonds’’. Imagine a piece of paper from the government (or a digital copy of that paper) that says that if you lend them $1,000 today, they will pay you $25 every month for three years and that at the end of the three years you will get your $1,000 back.
Fixed income. Recurring income over fixed time periods until the bond hits its ‘’maturity date’’. These bonds, or obligations can be short term, or medium term, or very long term. This is also called a debt market, a market where a lot of promises to pay back others are monetized and traded and this market is larger than the equities market.
Forex is an abbreviation for ‘’Foreign Exchange’’ meaning a marketplace where investors can buy and sell currencies. You can buy American Dollars with your currency and then sell it in return for another currency and so on and so forth with all available currencies.
This is a huge market, and the biggest in terms of trading volume. The point behind trading currencies is that currencies have values that go up and down depending on many economic factors. Such factors include, changes in a country’s money supply, trade dynamics between countries, and demand for a specific currency to earn interest. The Forex market is open all day long five times a week. The goal behind forex is to make profits on price differences between currencies over time.
If you have heard of the S&P500 you have a sense of what an index is. An index is a broad signal of the performance of a conglomerate of stocks.
The S&P500 is composed of 500 companies and this is a way for market participants to gauge the current stock market climate. There are a variety of indexes that focus on different sectors such as the Russell 2000 Index whose main focus are small cap stock (companies with small market capitalizations).
The famous Dow Jones Industrial Average is used as a proxy to determine the general health of the U.S. economy, and this is what radios allude to when talking about ‘’the markets’’. You need to know this for trading because it will come in handy as a ruler when trading exchange traded funds who often times try to ‘’beat’’ the market index return.
Investing in ETFs
An exchange traded fund (ETF) is a publicly traded fund that invests in a basket of companies that you can buy and sell shares of ETFs just like you would a regular stock.
An ETF will buy many different stocks and build a portfolio of companies. Some ETFs focus on a specific industry, some are domestic ETFs others international. There exists a broad variety of ETFs an example being the SPDR S&P 500 ETF (SPY) and ETFs that tracks the S&P500. ETFs contain all sorts of securities like stocks and bonds and commodities.
Commodities are things like grains, gold, beef, and oil. These are the everyday basic goods used in households, and by industry.
Commodities are known to move in an uncorrelated way to stocks which is a good way to diversify a portfolio. Commodities are more stable with respect to market volatility but they generate lower returns on investment. Commodities can be traded through ETFs where a fund manager while by the commodity and hold it in a trust or more commonly through a futures contract (next section).
Futures & Options trading
Options are contracts where an investor pays for the opportunity but not the obligation to buy or sell an asset at a specific price.
There are two type of options, puts and calls. Calls allow you to buy the asset. Puts allow you to sell the asset at the contract agreement date and strike price. If a stock is falling and you have the ability to sell (put) your option at a high price, you win. If the stock is going up and you exercise the right to buy at a lower price, you win. The point is that you pay money to have the opportunity to either sell or buy a stock a predetermined price for a specific duration of time.
Futures are different. They were designed originally for the producers of the commodity as a hedging tool against changes to prices due to things like the weather. Nowadays, most trading is done by specualtors (traders). A futures contract enables someone to buy a commodity at a pre specified price with the option to take delivery at that price at the end of the contract (typically 3-months).
Cryptocurrencies like Bitcoin and Ethereum are tradable digital assets that are traded on exchanges through a platform such as Coinbase. They are also traded through exchange traded products like ETNs. You can also trade public companies that mine bitcoin.