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
Why Equities Are the Riskiest Asset Class. Equities are generally considered the riskiest class of assets.
Which assets have highest risk factor? ›
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.
What is the riskiest investment type? ›
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.
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 |
Cash and cash alternatives — such as money held in a savings account, money market account, certificate of deposit, or money market funds — carry the lowest risk out of all asset classes, as it is extremely unlikely that you will lose principal held in these vehicles.
Which asset class has the lowest risk? ›
- U.S. Treasury Bills, Notes and Bonds. Risk level: Very low. ...
- Series I Savings Bonds. Risk level: Very low. ...
- Treasury Inflation-Protected Securities (TIPS) Risk level: Very low. ...
- Fixed Annuities. ...
- High-Yield Savings Accounts. ...
- Certificates of Deposit (CDs) ...
- Money Market Mutual Funds. ...
- Investment-Grade Corporate Bonds.
Safe assets are those that allow investors to preserve capital without a high risk of potential losses. Such assets include treasuries, CDs, money market funds, and annuities.
Which asset class is the least volatile? ›
On the other hand, if you'll need money from your portfolio soon, or you want less volatility in your portfolio, it might be tilted toward defensive assets, which could include cash, cash investments, and short-term U.S treasuries, which are typically less volatile than stocks and long-term bonds.
Which asset class is considered the safest and least volatile? ›
Cash - Cash and cash equivalents - such as savings deposits, certificates of deposit, treasury bills, money market deposit accounts, and money market funds - are the safest investments, but offer the lowest return of the three major asset categories.
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 are the two highest risk investments? ›
5 Best High-Risk Investments
- Initial public offerings (IPOs)
- Venture capital.
- Real estate investment trusts (REITs)
- Foreign currencies.
- Penny stocks.
Most sources cite a low-risk portfolio as being made up of 15-40% equities. Medium risk ranges from 40-60%. High risk is generally from 70% upwards. In all cases, the remainder of the portfolio is made up of lower-risk asset classes such as bonds, money market funds, property funds and cash.
What are the 7 asset classes? ›
The main asset classes include (1) equities (2) debt (3) commodities (gold &precious metals, agricultural products, energy, etc.) (4) cash (5) currency (6) real estate and (7) alternatives. Each asset class has its unique traits, and each offers its own blend of reward and risk.
What is the best asset class to invest in? ›
11 best investments right now
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
- Alternative investments.
- Cryptocurrencies.
- Real estate.
The stock market has proven to produce the highest returns over extended periods of time. Since the late 1920s, the compound annual growth rate (CAGR) for the S&P 500 is about 6.6%, assuming that all dividends were reinvested and adjusted for inflation.
Which asset has the highest liquidity risk? ›
Stocks of small and mid-cap companies have high market liquidity risk, as stated above. This is because buyers are uncertain of their potential growth in the future and hence, are unwilling to purchase such securities in fear of incurring losses in the long term.
Which investment typically carries the highest level of risk? ›
Investment in stocks is riskier compared to investment in other forms like government bonds, which are usually risk-free securities, certificates of deposit, cash, and equivalents. Stock investment has a large potential for growth and earnings, but it is also highly risky as these elements are not guaranteed.
What are the riskiest assets of a bank? ›
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities.
What size asset class tends to have the highest risk and highest return? ›
Let's take a closer look at the characteristics of the three major asset categories. Stocks - Stocks have historically had the greatest risk and highest returns among the three major asset categories. As an asset category, stocks are a portfolio's "heavy hitter," offering the greatest potential for growth.
