A group of securities that exhibit similar financial characteristics and behave the same in the marketplace is known as an asset class. Some examples of major asset classes include equities, bonds, money markets, and real estate.
Equities offer an ownership stake in a business. The familiar term for equities is stocks. Fixed-income securities, known as bonds, pay a fixed return at regular intervals over a period of time, after which the investor's principal is returned. Money market investments, which include government securities and certificates of deposit (CDs), pay a fixed interest rate and can be liquidated easily. Lastly, there is real estate. Assets classified as real estate include a person's residence, rental or investment properties, as well as commercial real estate holdings.
Why Equities Are the Riskiest Asset Class
Equitiesare generally consideredthe riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace.
Equity investing involves buying stock in a private company or group of companies. Doing so extends an ownership share in those companies to the investor. When the company increases in value, stockholders' investments in the company increase in value as well. However, when the company loses value, so do the portfolios of investors heavily invested in the company. Other than dividends – fixed regular cash payments enjoyed bystockholders – equities offer no guaranteed payments or rates of return. An investor can gain 100 percentor more on an equity investment in a year,but theycan also lose their entire principal. It is entirely dependent on the performance of the company.
People investing in equities must weigh the risk against the potential return. In finance, risk and return correlate positively. The more money an investor can make on a particular investment, the more that same investorstands to lose from it as well. Equities offer the potential to make a lot of money, as investors aren't shackled to a fixed rate of return, such as six percentor 10 percent.
An investor who purchases Company XYZ shares at $100 and sells them a year later for $150 makes a 50 percentreturn. Just as investors aren't limited by a fixed return, they aren't protected by it, either.If Company XYZ shares drop to $50 each, the investor loses half of his or her money.
How Real Estate Is Also Quite Risky
After equities, real estate subjects its investors to the most risk. The meltdown of 2008 demonstrated that real estate does not always appreciate in value. Real estate comes with additional risks not present in other asset classes. Environmental risks and maintenance costs must be weighed against potential profits when investing in real estate.
Real estate, long considered safer than equities, showed its ugly side in the late 2000s, when property values in many U.S. region. Like equities, real estate provides no guarantees. Moreover, investors must consider additional costs endemic to real estate, including maintenance costs, fees and property taxes. The roof cannot leak on stock or bond investments, but it can leak on an investment condo in Florida.
The Bottom Line
Equities and real estate generally subject investors to more risks than do bonds and money markets. They also provide the chance for better returns, requiring investors to perform a cost-benefit analysis to determine where their money is best held.
FAQs
Equities are generally considered the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace. Equity investing involves buying stock in a private company or group of companies.
What asset class is the most risky? ›
Stocks are generally considered to be riskier than bonds, cash alternatives and commodities. While both bonds and cash alternatives offer the investor a promised rate of return, stocks offer no such guarantee.
Which asset class is riskier? ›
Equity investments are generally considered riskier than other asset classes, but they offer the potential for higher returns. 2. Fixed Income: Fixed income, or bonds, are debt instruments issued by governments or corporations.
Which assets have highest risk factor? ›
Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.
What are the asset classes by risk level? ›
Understanding asset classes
| Asset Class | Risk of Loss (Risk) | Growth Potential (Reward) |
|---|
| Cash and cash equivalents | Very low | Very low |
| Equities | High | High |
| Fixed income | Low | Low |
| Alternative | Varies | Varies |
The 10 Riskiest Investments
- Options. An option allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. ...
- Futures. ...
- Oil and Gas Exploratory Drilling. ...
- Limited Partnerships. ...
- Penny Stocks. ...
- Alternative Investments. ...
- High-Yield Bonds. ...
- Leveraged ETFs.
Cash and cash equivalents
Examples include savings accounts, money market funds, and certificates of deposit (CDs). Cash and cash equivalents are generally considered to be the lowest-risk asset class, but they also have the lowest potential returns.
What are the 4 main asset classes? ›
There are four main asset classes – cash, fixed income, equities, and property – and it's likely your portfolio covers all four areas even if you're not familiar with the term.
What is the most risk free asset? ›
Debt obligations issued by the U.S. Department of the Treasury (bonds, notes, and especially Treasury bills) are considered to be risk-free because the "full faith and credit" of the U.S. government backs them. Because they are so safe, the return on risk-free assets is very close to the current interest rate.
Which is the safest asset class? ›
Fixed deposits with banks are still considered one of the safest options for investing. Here, you get to accumulate money at a much higher interest rate compared to regular savings accounts.
The four main asset classes are cash, fixed interest, property and shares. Cash and fixed interest asset classes are what we call 'defensive' assets, which means they are designed to defend your investment from losses.
What are the top asset classes? ›
Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments. Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies in the asset class mix.
What are assets at risk? ›
Risk assets are assets that have significant price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies.
What are the three main asset classes? ›
Equities (stocks), fixed-income (bonds), and cash (or its equivalent) are three asset classes every investor should be familiar with when considering an investment strategy. While there are many asset classes, this article will focus on the primary three.
What are the asset classes for risk and return? ›
What is asset allocation?
| Asset class | Risk | Return |
|---|
| Property Includes residential, industrial and commercial property. | Moderate/high | Moderate/high |
| Shares Involves the purchase of a stake or financial interest in a company, enabling you to share in the profits and future growth of that company. | High | High |
2 more rowsA cash investment tends to be seen as a lower risk, lower return option than bonds or equities. It can be a useful tool for risk‑averse investors, or as a temporary home for money in between longer‑term investments.
Which asset class is the most volatile? ›
Commodities are typically more volatile than currency and equity markets due to the lower levels of liquidity or trading volume than other asset classes, as well as the constant exposure to weather events and other production issues that might affect supply and demand.
