We all know that building a diverse portfolio is key to minimizing risk. When it comes to investing, it helps to know what the available options are. It’s important to understand which investments would best suit your personal needs and financial situation. In this article, we will discuss both traditional and alternative investment classes.
Traditional investment classes
Traditional investment classes are those you would immediately think of in a conversation about “investments”. This includes the basic categories of cash, stocks, and bonds. These are some of the most common ways to invest your money or work towards retirement.
Stocks are a kind of security that represents partial ownership of a company. They are classified into two major categories;
- Common stocks – If you own common stock, you can usually vote at shareholder meetings. You will also receive dividends.
- Preferred stocks – If you own preferred stock, you usually cannot vote. However, you will have a higher claim on assets and earnings.
There are many different types of stocks. Let’s take a look at some of them.
- Domestic stock – This simply means a company based in the country where you reside.
- Foreign stock – This is any company not based in your country of residence.
- Emerging stock – This is a company based in a developing country.
- Small-cap stock – The market cap is lower than $2 billion.
- Mid-cap stock – The market cap is between $2 billion and $10 billion.
- Large-cap stock – The market cap is higher than $10 billion.
- Value stock – This will trade at a low price compared to its fundamentals.
- Growth stock – Your earnings are likely to outgrow the market.
- Dividend stock – This will pay out periodic dividend payments.
Bonds are a type of debt investment. When you buy bonds, you effectively loan money, which will then be paid back with a fixed interest rate. Typically you are loaning the money to a corporation or a government entity. Let’s have a look at some of the different types of bonds.
- Short-term bond – It is likely to mature within 3 years.
- Medium-term bond – It is likely to mature between 3 and 10 years.
- Long-term bond – It is likely to mature after more than 10 years.
- Domestic bond – It’s from a company in your country.
- Foreign bond – It’s from a company that isn’t based in your country of residence.
- Emerging bond – It’s from a company that is based in a developing country.
- Investment-grade bond – It has a low risk of default.
- Junk bond – It has a higher default risk but also offers higher returns.
- Government bond – it has been issued by the government in order to support spending.
A mutual fund is professionally managed. It will pool money from a large number of investors to purchase securities. In the UK, it can be known as an open-ended investment company. Mutual funds can come in many different styles. They will have different costs and different overall goals.
This is simply money. It can be stored under your mattress or put in a savings account. You won’t earn much return. However, it is the most liquid of all assets. It is immediately available if you need to make a big purchase or have other needs.
Alternative investment classes
The definition of alternative investments can greatly vary. Here we will use the term to discuss a few investment classes that don’t fit the more traditional models of investment. The term alternative investment doesn’t necessarily mean that it’s safe or risky, good or bad. It just means that they are more unexpected investment options. All investments come with their own potential risks and rewards.
A commodity is any valuable or useful item. In the world of investing, it can refer to raw materials such as gold or oil. It can also refer to soft commodities such as orange juice or cotton. Commodities are physical goods. Their price is driven by supply and demand.
Stock prices are also affected by supply and demand. However, stocks can also provide profits based on a company’s innovations and growth potential.
Real estate can include both commercial and residential properties. It could mean buying an apartment to lease, or farmland investing. In essence real estate means land and everything built on the land. Direct real estate investing means leasing or selling at a profit.
Indirect real estate investing means buying stocks in a real estate fund or another type of pooled investment.
Collectables are items that are worth money due to being rare or being in high demand. This investment class can include artwork, classic cars, vintage wines, stamps, coins, old magazines, and antique furniture.
Private equity means investing directly in a private company. They may not be listed on the stock exchange. The most common to invest is through a private equity fund. This fund will pool money from a number of investors and choose which companies to invest in.
This is money invested in startups and small businesses. They can have a big growth potential over the long term. However, this is a high-risk, high-reward investment strategy. Wealthy investors may like to invest in venture capital.
These are financial contracts that get their value from the performance of another asset or an interest rate. These contracts can include futures, forwards, and options.
This includes life insurance and annuities. An annuity is when you pay off a life insurance premium that is distributed back to you over time.
This simply means any currency not typically used in your country of residence.
These are securities from companies that are going through bankruptcy (or near bankruptcy). They can be high risk but are cheap to purchase. You may turn a profit if the company’s situation is not as bad as the market believes.
Whether you decide to invest in traditional or alternative investment classes, education is key. You should always have a diverse portfolio to spread the risk. By understanding something about the different asset classes, you will be more ready to decide what is right for you. Remember that there is such thing as a sure investment, and it always comes with an element of risk.