Asset Classes

Building up your first portfolio will cover a range of assets.

An asset class is a group of similar investments.

A typical portfolio has a mix of cash, equities and bonds. In some cases this covers collectibles.

Equities
Equities (also known as ‘shares’) are issued by a public limited company, and are traded on the stock market. When you invest in an equity, you buy a share in a company, and become a shareholder. Equities have the potential to make you money in two ways.

1.If the share price increases you obtain capital growth which means your money grows

2.You receive income in the form of dividends (payment made by a corporation to its shareholders, usually as a distribution of profits)

It is important to note that neither of these is guaranteed as there is a risk that the share price will fall.

When a share is purchased you technically own a stake in the company and are entitled to the profits gained by the business which is pay out as dividends.

If the company goes bankrupt it can leave investors in a bad position. Usually long-term returns have come from shares of roughly 5%-6% a year after inflation.

Bonds
Think of Bonds as a loan.

They are issued by companies and governments as a way of raising money. Bonds provide a regular stream of fixed income  over a specific period of time. There is usually a set date to return capital to investors.

Bonds can be described more of a stable investment and a low risk ,but it is important to note that you may get  lower returns over the long-term. Investing in fixed interest securities issued by companies other than those issued or guaranteed by certain governments, can be risky as return on investments is not guaranteed.  Bond investments are sensitive to changes in interest rates.

Bonds issued by the UK government are “gilts”. Those issued by firms are called corporate bonds.

Cash
Cash investment tends to be seen as a lower risk and a  lower return option than bonds or equities. This tends to be less suitable for investors seeking long-term capital growth as the interest rate may be low.The value of money also changes so it is important that you note that inflation can affect the cash investments e.g  £500 can be low in value in the next 2 -3 years.

It is usually advised that you have cash in the bank that at least covers three to six months of living costs in cash so that you are not losing out on the cash investments.

Property

This is in relation to commercial property and getting return on investments by the rent paid by the tenants. Commercial property usually provides long-term returns. However, it is important to note that this industry can boom or go bust. 

Collectibles

A collectible is any physical asset that appreciates in value over time because it is rare or it is desired by many. There is no specific rule as to what a collectible is. For example collectible include art, classic cars, wine and stamps.

Collectibles have a  period of rapid growth due to the market performance or periods of popularity, which increases the demand and increase in price. 

Collectibles can take very long to increase in value and can be bought just about anywhere. Places to collect these collectibles are flea markets, antique stores, collectible retailers, auctions, garage sales, and through online exchange sites. 

It is important to bear in mind if you decide to sell your collectible at auction houses and galleries they usually  run commissions of 20%, or higher. For some this may be a weakness of investing in collectibles. 

Overall it is important to do your research.

 

 

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