An asset class represents a broad investment opportunity, each with unique risk and reward opportunities. Here are some common investment vehicles and their definitions:
Cash Investments: Refers to money in the bank, either in savings or in Money Market funds. It has the highest level of liquidity and is the least risky. The chances are very good that a dollar will be worth a dollar from the time of deposit until the time of withdrawal, although it’s purchasing power may change with inflation or deflation.
Money Market Account: Similar to a savings account from a bank, but issued by a mutual fund company. Typically they pay a slightly better interest rate than a bank savings account. The interest rate paid to you fluctuates with the interest rates in the overall economy.
For example, if the borrower has to pay interest at a fixed rate once a year, and to repay the principal amount on maturity. This category includes bonds, which pay interest, and also includes rents, royalties, and dividends.
Bond: A bond is a loan that investors make to a government or to a corporation for a certain period of time (term), guaranteed by the credit worthiness or physical assets of the issuer. Because it is a fixed income product, interest is paid at intermediate times during the term of the loan, and at the end of term, the principal sum that you loaned is supposed to be returned to you.
Bonds are typically a more conservative investment compared to stocks, and they provide a steady income in the form of an interest payment on a regular basis. Bonds can be used for short-term emergency funds or for diversification purposes for long-term investors. They are generally more risky than Money Market Accounts, but less risky than Stocks. Their risk depends on the term of the bond and the financial stability of the issuer.
Money from stocks is distributed through dividends (regular cash payouts) and, if the company is profitable, through Capital Gains. A Capital Gain is the profit made by selling the shares at a higher price than what you paid for them.
A company’s stock price can move up or down depending on a number of risk factors (like a teeter totter or seesaw).
International Equity: Stocks of Foreign Corporations.
Large Cap Equity: Stock in companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term “Large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.
Small Cap Equity: Stocks from corporations with relatively small market capitalization values. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion (total company number of shares outstanding multiplied by the stock price per share).
Other: Contains many alternatives: commodities, currencies, collectibles, real estate, unlisted or private business opportunities, all of which will qualify as parts of a total allocation of assets. Any investment that is designed to appreciate in value or provide a financial remuneration is part of this allocation.
Personal Property: This is property which is meant to be used, enjoyed, and expended, and by design will become depleted, and lose or depreciate in value because of its use. Therefore, most of these items would not be included in an Asset Allocation.