Investment assets are grouped into categories known as asset classes, including stocks, bonds, commodities, and currencies. By combining multiple asset classes into a portfolio, investors can mitigate risk exposure and diversify their exposure to the markets. Hard assets, distressed assets, and real estate are also types of investment assets.
Investment assets in financial markets are securities designed to generate profit. They are grouped into categories known as asset classes, and can be broken down into stocks, bonds, commodities, and currencies. Each asset class tends to react differently to similar economic news, and therefore by combining multiple investment assets into a portfolio, a mix of held investments, an investor is mitigating risk exposure. In addition to being grouped by broad financial components, investment assets can be classified based on detailed characteristics, including traded stocks in a similar industry, such as energy.
There are several types of investment asset categories, but all are used to enhance an investment portfolio. Shares listed on financial markets belong to the variable income group, while bonds are classified as fixed income investments. Real estate is a type of hard asset because it is a tangible item, although some properties trade as a security in an index known as a Real Estate Investment Trust on the stock market. Commodities represent an umbrella asset class under which various investment assets are traded, including oil, gas, and agricultural products.
By combining asset classes that are not correlated with each other in a portfolio, an investor is diversifying their exposure to the markets. Uncorrelated assets do not tend to trade in sync with each other. For example, if equities decline sharply, commodities won’t necessarily follow suit, which could prevent the portfolio from taking further losses. Different asset classes tend to react differently to the same news or economic development, and by diversifying across multiple asset classes, an investor is mitigating risk.
In addition to real estate, hard assets can include other tangible products. This may include the inventory and machines of a manufacturing company or the oil and gas reserves of an energy company. These investments are listed on a company’s balance sheet, making it possible to compare a company’s investment assets with its liabilities.
Distressed assets represent another form of investment assets. These inversions are created by various scenarios. They can be made up of land from a foreclosure on a private residence, inventory of failed companies, or even stocks and bonds issued by a company that has been forced into bankruptcy protection. Since the owner or seller of distressed assets is often in dire financial straits, the investor can purchase the assets at a bargain price.
During an economic downturn, distressed assets are more prevalent because businesses are more likely to be in financial trouble. These opportunities can be difficult for an individual investor to identify and are risky because there is no guarantee that asset values will recover. Investors may want to turn to a professional, such as a mutual fund manager, who specializes in adding distressed assets into a portfolio for diversification.
Smart Asset.
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