ASSET CLASSES

An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace.

LOW RISK ASSETS


HIGH RISK ASSETS


SINGLE COMPANY STOCKS


  • You buy a share of a single company.
  • You own a part of the company.
  • If you're lucky, you get a periodic dividend, from the company earnings.
  • High risk - Companies can go bankrupt or get regulated by government.
  • Don’t put all your eggs in one basket.

GROWTH STOCKS


Companies that the market expects to grow revenue or earnings generally faster than 10% per year.

Typically

  • Technology stocks, like Apple, Google, Microsoft, Tesla, Facebook, Amazon, Adobe, etc.
  • Don't pay out dividends to shareholders, the money are invested in the company instead.

VALUE STOCKS


Companies with a long (30-60 years) record of attractive and consistent dividend yields to the shareholders.

Typically

  • Less volatile.
  • Often complements growth stocks.
  • Steady passive income, via dividend yields, without having to sell the asset.

INDEX FUNDS


  • You buy a basket of different percentages of shares from multiple companies.
  • Can include different international and/or national company stocks.
  • Can be active (higher cost) or passive (lower cost) and follows an index.
  • Dividend policy can be accumulated or periodic dividend yield payout per stock.
  • Can often be bought in local currency, saving the risk of currency fluctuations, when buying and selling.
  • Passive funds have lower annual percentage costs, where active funds typically has higher costs.

Examples of notable indices:

ETF - Exchange Traded FunDS


  • You buy a basket of different percentages of shares from multiple companies or indices.
  • Based on a theme-, trend-, industry domain or otherwise specialized focus, like robotics, real estate, electric cars, indices, hotel chains, biggest dividend companies, etc.
  • Risk of currency fluctuations, when buying and selling, if not in local currency.
  • Dividend policy can be accumulated or periodic dividend yield payout per stock.
  • ETF's often have lower annual percentage costs than index funds.

OPTIONS - CALL & PUT CONTRACTS


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An option is a kind of insurance contract you purchase, to buy or sell a minimum of 100 shares of a specific stock, at an agreed strike price, before a specific expiration date.

Investor portfolios are usually constructed with several asset classes. These may be stocks, bonds, ETFs, and even mutual funds. Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot.

  • The farther away the expiration date is, the smaller the risk.

SELLING A PUT OPTION


You sell a put option, when you want to own a stock at a discount.

BUYING A PUT OPTION


You buy a put option, because you believe the stock price will decrease in the future and you want to be able to sell 100 shares of the stock, at a higher strike price, without owning any shares.

SELLING A CALL OPTION


You sell a call option, when you want to collect a premium, and hope the contract is not exercised (expire worthless), because the price is below the strike price, at the option expiration date.

You have to sell the stocks to the buyer, if the contract is exercised. But you will always keep the premium.

BUYING A CALL OPTION


You buy a call option, because you believe the stock price will increase in the future and want to buy it at a lower strike price.

FUTURES


Futures are, in principle, like options except that buyers of options has "the right" to exercise their buy, but are not obligated, like buyers of futures.

KEY TAKEAWAYS


  • An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations.
  • Equities (stocks), fixed Income (bonds), cash and cash equivalents, real estate, commodities, futures, and other financial derivatives are examples of asset classes.
  • There is usually very little correlation, and in some cases a negative correlation, between different asset classes.
  • Financial advisors focus on asset class as a way to help investors diversify their portfolio.

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