When you start trading, it is important to understand that
multiple types of asset classes
exist to invest in.
The four most heavily traded asset classes are, in order, Equities, Fixed Income (Bonds), Money Markets (Cash), and Alternative (tangible) Investments
. In this post, we will cover each of these asset classes’ basic properties, how to profit from trading them, and the risks associated with doing so.
The main assets in Trading are:
– Equities
-Fixed income
-money markets
– Alternative investments
Equities
are one of the most important assets. When a company “goes public,” shares of ownership are bought and sold on the open market stock exchanges such as the NASDAQ or NYSE.
common-stock
is the most actively traded security type of the equity asset class followed by mutual funds, which are a diversified group of fractional shares of these common stocks. The most common risk associated with the trading of equities is that a company’s share price can dip below what it was purchased at, resulting in a loss.
Equities are the most volatile of securities, especially when held short term.
fixed income
Securities, commonly known as “bonds”, are another popular asset. A bond is basically a company’s debt to you as the buyer. It is a promise that in ‘x’ number of years, until maturity, you will receive a fixed amount of income based on the bond’s interest rate of return (as well as the principal amount returned). While fixed income is seen as one of the safer and less risky instruments of trade, risks do still exist.
A bond’s value exists in direct response to inflation as well as rising or falling interest rates.
The other risk factors are credit and liquidity. Liquidity risk is associated with the market demand for security.
The third asset is Money Markets
. This type of asset is commonly invested in due to high liquidity and safety. Money markets are typically short-term – with the advantage of more competitive interest rates than bank savings accounts. Their liquidity makes it easy to turn an investment into cash while simultaneously earning a low return.
Despite its safety, the risk of inflation is still a factor, as it can become higher than the low returns. This reduces purchasing power.
The fourth main asset in trading is
Alternative or Tangible Investments.
They make up the largest volume of the four asset classes listed here.
The most common is real estate, which when bought, sold, or rented, counts as an investment. This includes lands with immovable properties such as crops and minerals.
Various risks of “real” assets are property value fluctuations, expenses, steady income, and environmental liabilities.
Liquidity can be a risk as well when the investor wishes to sell if little market demands exist.
Trading is not for everyone. It is a risk. It is rewarding. You must be prepared for the unpredictable, and for that the best thing to do is to study with the best trading teachers.