Asset classes consist of a group of securities with varying degrees of risk.
There are three main asset classes.
- Bonds (also referred to as fixed income)
Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company, and are traded on the stockmarket. When you invest in an equity, you buy a share in a company, and become a shareholder. Equities have the potential to make you money in two ways: you can receive capital growth through increases in the share price, or you can receive income in the form of dividends. Neither of these is guaranteed and there is always the risk that the share price will fall below the level at which you invested.
Bonds also referred to as fixed income securities, are issued by companies and governments as a way of raising money and are effectively an ‘I.O.U’. Bonds provide a regular stream of income (which is normally a fixed amount) over a specified period of time, and promise to return investors their capital on a set date in the future. Once bonds have been issued, they’re bought and sold between investors without the involvement of the issuer. Bonds are generally considered to offer stable returns, and to be lower risk than equities – and hence deliver lower returns than equities.
Cash tends to be held within a bank account where interest can be gained. Alternatively, cash funds use their market power to get better rates of return on deposits than you would get in an ordinary bank account. They often invest in very short-term bonds known as ‘money market instruments’, which are essentially banks lending money to each other. In addition, cash funds can provide exposure to global currencies, which may not be easy to purchase on the open market and could be costly transactions.