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
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.
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.
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 |
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.
Which asset is riskier? ›
Some of the risky assets include cryptocurrencies, stocks, corporate bonds, etc. Is cash a risk asset? Cash has the lowest risk.
What are higher risk assets? ›
While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.
What is the riskiest type of investment? ›
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.
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.
Which is the safest asset class? ›
Cash and on-demand cash deposits are the epitome of safety in the asset world. There's virtually no risk of loss (unless it is lost or stolen), making it a very reliable asset. However, its safety comes at a cost: it generally yields minimal returns, especially when inflation runs high, reducing its purchasing power.
What is asset level of risk? ›
Asset-level risk analyzes risk associated with a specific property. This analysis isn't just about the property and its investment structure. Asset-level risk also involves the surrounding properties and various local economic trends.
Cash and Cash Equivalents
This type of investment is considered very low risk since there is little to no chance of losing your money. That peace of mind means the returns are also lower than other asset classes.
What is the hardest asset class to trade? ›
Forex, futures, stocks, options, commodities, bonds? Forex is the hardest. Although it is the most liquid and you can get in and out of trades at speed - you usually get orders filled on the button. It is commonly said that 95 percent of retail Forex traders will fail to make money.
What is the most risky asset class? ›
Why Equities Are the Riskiest Asset Class. Equities are generally considered the riskiest class of assets.
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.
What are the top asset classes? ›
This helps diversify your investments and the level of risk and return that comes with each one. However, there's usually no correlation between asset classes and investments. In general, equities or stocks, fixed-income securities, cash or cash equivalents and real estate or commodities make up the main asset classes.
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.
