An asset class is really just a type of investment. The main asset classes that people refer to are cash, fixed interest, property and shares.
The reason why it's so important to understand asset classes is because they each have different levels of risk and return – the main criteria by which investors generally choose what they invest in.
Understanding what to expect from the different asset classes will help you decide which types of investments best suit your needs and investment timeframe.
Cash generally refers to investments in bank bills and similar securities which have a short investment timeframe.
Cash investments generally provide a stable return, with low potential for capital loss.
Fixed interest securities, such as bonds, generally operate in the same way as loans.
You pay cash for the bond, and in return you receive a regular interest payment from the bond issuer for an agreed period of time. The value of the bond can fluctuate based on interest rate movements.
When the bond matures, the loan is repaid in cash. Historically, bonds have provided a more consistent but lower return than shares.
Property generally involves buying a property directly or investing in property securities. Property securities do not involve buying a property directly.
Instead they can provide an indirect exposure to property and generally represent a part ownership of a company or an entitlement to the assets of a trust.
The company or trust may hold, manage or develop infrastructure and real property in sectors such as office, industrial and retail.
Property securities are generally listed on a stock exchange and are bought and sold like shares.
Shares represent a part ownership of a company and are generally bought and sold on a stock exchange.
Shares are generally considered to be more risky than the other asset classes because their value tends to fluctuate more than that of other asset classes.
However, over the longer term they have tended to outperform the other asset classes.