General terminology
This is an emotive word that means many different things to many people, ranging from threat or danger to chance and probability. As far as investing is concerned the same descriptions hold true, although usually it refers to the relationship that exists between levels of risk and the potential rewards offered by different types or classes of assets. Therefore it is important to understand how the different asset classes work
Probably best described as the actual things you buy or invest in. Different types are viewed as being more or less risky and in return offer the potential for higher or lower returns. There are five main asset types:
Also known as Shares. By buying a share in a company you physically own a portion of that company and therefore you will “share” in the company’s fortune, whether good or bad. It the company prospers then its value increases, thus increasing the value of your “share” and if the company falters and its value decreases then the value of your “share” decreases.
These are loans issued by the Government. The government promises to buy them back at the same price at a fixed point in time. In return they pay you a fixed annual “coupon”. Generally speaking, if the coupon payment is higher than the prevailing interest rate you could get then the value of the Gilt increases and vice versa.
These are the similar to Gilts but instead of being issued by the Government they are issued by companies who are looking to raise money.
This can be anything from a shop to a factory or an office or a warehouse. Your investment rises and falls in line with the changes to the property’s value. You also receive the rent that is paid for the property and are also responsible for the maintenance costs of the property. You can choose to physically buy a whole property or buy “units” in a fund which invests in property.
These are the raw materials that are used to make something, for example Gold, Oil and Copper or Corn, Pork bellies and coffee. Again like Commercial property you can buy the physical commodity or buy units in a fund which invests in either a single commodity or a variety of them.
I have purposely not included Cash as an Asset Class purely as I believe that cash is something that is yours and that all you do is to ask someone to look after it for you. If somebody wants to do something with your cash, ie a bank wants to lend it to someone else then they will pay you for the privilege, in the form of interest.
This is purely the term used to describe your collection of different Assets.
Dating back to the time of the Crusades when someone was “trusted” to look after a Knights property whilst he was away. The same is true today, they are simply a legal framework which sets out how and who you would like to benefit from something that you own. They can be used for a number of purposes including making sure that a pension fund or life assurance payout goes to who you would like it to after you have died to being used to help reduce an Inheritance Tax liability.