As a consumer planning for the future or creating an income, it can pay well to understand how your investments work. While part of this important process involves staying abreast of the latest market news, it’s also a wise idea to build up your knowledge about the terminology used in investing. If you’re wondering what assets are or have difficulty understanding the different asset classes available, read on for everything you need to know.
How does investing in an asset work?
While you might invest in a wide variety of asset classes, it’s the fund that actually invests directly in an asset, and not you. In the following passages, the term ‘investing’ refers to you as a consumer making an investment in the fund, and then the fund investing in specific assets. For instance, any dividends awarded from shares, or rental income earned by a property fund, will be paid out to the fund, instead of directly to you.
Asset classes are not necessarily superior to one another – each kind has its own advantage and is suited to specific investment objectives. It’s always a wise idea to create a well-balanced portfolio where investments are made in different asset classes, as this helps spread potential risk, or you can invest your money in an investment fund that provides this service for you. As every individual asset class will react differently to identical market and economic conditions, investing in a variety of different types can assist in minimising losses should a single asset type perform badly.
What are the main types of assets available to invest in?
You will find that there are four different investment categories that money is typically invested into. These categories are known as asset classes and include property, equities fixed interest and cash.
How does property investment work?
In terms of pensions, property investment refers to commercial property like retail units, factories and offices. Investor savings are employed to buy premises, which are subsequently let to enterprises that pay out a rental income.
People investing in property access this asset class via funds managed by dedicated investment managers, through either an ISA or their pension. These funds usually invest in a large number of varied commercial property types to decrease risk by diversifying.
The biggest risk of investment in property funds is that the ability to access your money can sometimes be suspended. Investment managers may not be able to instantly sell commercial properties in a fund to pay out cash to an investor who wishes to leave.
What are equities?
‘Equities’ is just another term for a company’s shares. They provide the shareholder with a stake, giving them part ownership of a business, which may pay out a dividend should the firm make a profit.
These shares are traded through exchanges. The total value of all of the shares issued by an enterprise is referred to as the business’ market capitalisation. This essentially refers to what a company is worth.
Consumers can directly invest in one company, however, many people invest in equities using a fund managed by a professional investment manager via their ISA or pension. These funds commonly invest in hundreds, and sometimes thousands, of different enterprises, helping spread the associated risk.
Shares are sought after for their history of delivering long-term gains, keeping in line with inflation and even additional returns. However, the price of shares is volatile, which means their value can fluctuate up or down by considerable amounts when impacted by market conditions.
What does the term “fixed interest” mean?
The concept of an investor lending money to a major company or government might seem strange, but, in effect, this is what fixed interest investing involves.
Fixed-interest investments occur when the funds you’ve invested in make a loan to either a company or government. Here in the United Kingdom, loans to its government are commonly called ‘gilts’, while loans to companies are usually known by the name ‘corporate bonds’. In an ISA or pension, we typically access such options by investing in a dedicated fund that then invests in a portfolio for gilts or corporate bonds. The company or government that the fund has provided a loan for agrees to pay any interest due until the end of the loan’s term. At this point, they usually aim to pay back all the money that was lent to them.
The advantage of fixed-interest investing is that consumers should receive a known rate of income if they keep their investment long enough for the loan to be paid back.
How does cash investing work?
Cash investment attracts investors looking for relative safety. The value of cash investments is typically stable, and investors accrue interest over time. In ISAs and pensions, this interest is tax free.
However, the value of a cash investment can still decrease. Many cash investments can carry an additional charge for investment. If interest rates drop low, this charge can reduce the interest paid out on investments to zero and beyond, into negative figures.
Although cash usually comes out on top in terms of being a low-risk asset class, it is typically perceived to experience a loss when it comes to long-term returns. In 2021, interest rates for cash investments have hit historic lows, and this current low interest may further be eroded by inflation in the future. This is the key reason why many consumers view cash investments as a temporary safe haven, best utilised in the short term only.
Do you need investment advice in Shropshire or Chester?
If you’re interested in further understanding the different asset classes available, our expert team will be happy help. At Hartey Wealth Management, we create perfectly tailored portfolios designed to suit your investment ambitions. Carefully balancing risk and return with active and passive investments, we build robust portfolios designed to cope with fluctuations in today’s modern market. Contact us today for a fresh perspective on your current investments or unbiased advice on new asset now available.