Estimated reading time: 3 minutes
What exactly is investing?
Investing is the process of putting aside money now and saving this for the future. With an investment, your aim is to purchase assets that either provide you income or increase in value over time which are the two components of your return. You are sacrificing your current spending power to increase your future spending power.
There are many different types of investments which are typically called Assets and grouped under Asset Classes.
Part 1: Asset Classes
The main asset classes are Cash, Fixed Interest, Shares, Property and Alternatives. These assets have individual characteristics that mean over time they will perform differently.
Cash:
Cash is generally considered the safest asset class you can hold. It is easily accessed and can be used to purchase goods and services. You will not receive any increase in the value of your asset over time, however you generally will receive income in the form of interest, either monthly income or at the end of a fixed term period such as with a term deposit.
Fixed Interest:
Fixed interest assets are debt assets. Other common names for fixed interest are bonds, debt securities or debentures. These assets are higher risk than cash assets, but still considered defensive securities. Fixed interest assets can have changes in prices (both up and down), however the bulk of their return is from income payments which you contractually are eligible to receive. You are not guaranteed a return, and can lose money in fixed interest assets.
Shares:
Shares (or equities) are a higher risk asset. They denote an ownership stake in the company you purchase the shares in and as such, your long term performance is typically in line with how well the company performs and makes money. They are considered a growth (or risky) asset as they have a high level of volatility, including a much higher chance of loss than assets such as fixed interest or cash. Your return is typically from a change in the price of the asset, or through income in the form of a dividend payment. You can lose money when investing in shares.
Property & Infrastructure:
Property & Infrastructure assets are those assets that are tangible, such as a residential house, or an infrastructure asset such as a rail road. They are also considered a higher risk asset as there is substantial chance of loss when investing in these assets. Your return is generally a combination of the change in price of your asset, and an income component, generally either rent or dividends. You can lose money when investing in property and infrastructure.
Alternative assets:
There are many different types of assets out there that may not fit nicely in the other categories. These are generally classed as alternative assets as they can perform similarly to a combination of different asset types, or they may act completely different to other asset classes. Alternatives are a complex asset class and the characteristics of each asset will generally differ based on its own unique characteristics. Examples of alternative assets include Water entitlements, Futures, Options or other derivatives and precious metals such as gold. You can lose money investing in alternative assets.
Author: Harrison Trippett
Disclosures:
- Past performance is not a reliable indicator of future performance.
- This information has been compiled from sources considered to be reliable, but is not guaranteed.
