Module 2 - Part 1/5: Asset Classes

In this article, we discuss the 3 of the 7 different types of asset classes.

Welcome to the EasyEquities Mentorship program, where we make investing EASY for you!

We have prepared 6 modules that we will post on FinMeUp over the month of July.

The modules are intended to give investors the necessary knowledge to start their investing journeys.

Lets get right into it!

The big question is: what should you invest in?

This topic will explore the different investments available to investors and their risk-return relationship. 

Once investors understand the different asset classes, it will become a lot easier to decide what their investment objectives are and what their risk tolerance is.

The main asset classes that we will discuss are:

Shares (Equities)
Cash
Bonds
ETFs
Real Estate
Cryptocurrencies
Commodities

All these asset classes are available on the EasyEquites platform.

Investors should know that there is a direct correlation between risk and return. The more risk an asset class carries, the more returns an investor can potentially gain. The less risk an asset class carries, the fewer returns an investor can potentially gain. At the same time, high risk can also mean the investor can potentially lose quite a bit of capital. 

[All the images attached show the risk level for each asset class.]

Shares

Simply put, shares are tiny parts of a business. Buying shares makes you a part-owner in the business from which you purchased the shares. Investors buy shares to sell them for a higher price at a later date. 

Shares are the best-performing asset classes over many decades. They are also one of the most volatile (their prices tend to change rapidly and unpredictably) asset classes out there.

Shares can give investors returns through capital growth and dividends and are very sensitive to the economic cycle. 

Cash

Cash as an asset class can mean money in a bank account, money in a fixed deposit account, or an investment in a money market fund.

Cash is the safest asset class of them all, however, they have the lowest return over time. Cash has the lowest chance of losing capital but the highest chance of losing purchasing power due to inflation.

Cash is considered short-term and easy to access.

Bonds

A bond is essentially a loan from an investor to a borrower. The borrower is typically corporate or governmental. 

Interest rates are pre-determined, and the borrower pays back the bond at an agreed-upon date.

A bond is typically low-risk and considered safe. Bonds are income-producing assets however, they rarely outperform inflation.

For example, an investor buys a R10 000, 5-year bond with an interest rate of 2%. That investor will receive a R200 payment (R10 000 x 2%) once a year for 5 years.  The R10 000 deposit will then be returned after the 5 years.

[We will go through the remaining four asset classes on Tuesdays FinMeUp post].