A group of similar investment vehicles is referred to as an asset class. Different classes or types of investment assets, such as fixed-income investments, are classified based on their financial structure. They are typically traded in the same financial markets and are governed by the same rules and regulations.
• Stocks or equities – Equities are shares of ownership issued by publicly-traded companies. They are traded on stock exchanges such as the Nigerian Exchange (NGX). You can potentially profit from equities either through capital appreciation (a rise in the share price) or by receiving dividends. The asset class of equities is often subdivided by market capitalization into small-cap, mid-cap, and large-cap stocks.
In the stock or equity market, a market cap is derived by multiplying the price of a stock by the total number of shares out in the market. A small-cap stock is a company with a market capitalization valued from $300 million to $2 billion. Whereas, mid-cap stocks are companies with a market capitalization generally between $2 billion and $10 billion while large-cap stocks have a market capitalization value of more than $10 billion.
• Bonds or other fixed-income investments – Fixed-income investments are debt securities that pay a fixed rate of return in the form of interest. Such investments are generally regarded as less risky than investing in equities or other asset classes.
• Cash or cash equivalents, such as money market funds – Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations) are examples of items commonly considered to be cash equivalents. The primary advantage of cash or cash equivalent investments is their liquidity. Money held in the form of cash or cash equivalents can be easily accessed at any time.
• Real estate or other tangible assets – Real estate and other physical assets are viewed as an asset class that provides inflation protection. Because such assets are tangible, they are regarded as more of a “real” asset. In this regard, they differ from assets that exist only in the form of financial instruments, like derivatives.
• Forex, futures and other derivatives – This category includes futures contracts, spot and forward foreign exchange, options, and an expanding array of financial derivatives. Derivatives are financial instruments that are based on, or derived from, an underlying asset. For example, stock options are a derivative of stocks.