What is an asset class?
An asset class is a group of investment vehicles that share similarities, including:
- having a similar financial structure;
- governed by the same rules and regulations;
- performing comparably in the same financial markets;
- subjected to the same level of risk.
How many asset classes are there?
Historically, there have been three asset classes, referred to as the main or primary asset classes, namely: Equities (stocks or shares), bonds (fixed income), and cash and cash equivalents (such as money market instruments).
Nowadays, real estate and commodities are also included in the category of main asset classes by analysts and investment professionals.
In addition, some investors add alternative asset classes to the asset class mix, namely: hedge funds, futures and other financial derivatives, cryptocurrencies, art, stamps, and other collectibles.
The five main asset classes
Equities
Equities, also referred to as shares[1], represent ownership in a public company, also known as a public traded company. When you buy shares in a company, you become a shareholder of that specific company, having a claim to part of the company’s profits and assets.
Typically, the shares of public companies are traded on stock exchanges or over-the-counter (OTC) markets.
Equities enable shareholders to potentially generate income in two ways:
- Capital growth when the share price increases.
- Dividends paid by the company.
However, neither of the two sources of income is guaranteed. Shares have always the accompanying risk that their prices will drop below the level at which a shareholder bought them. In addition, some companies may choose to use profits and retained earnings to reinvest in the company, rather than distributing dividends to shareholders.
The asset class of equities is often divided into sub-classes based on a company’s market capitalisation, namely small-cap, medium-cap, and large-cap shares.
Historically, equities provide the highest return of all the asset classes but also are the most volatile of the asset classes.
Bonds
A bond[2], also known as a fixed-income investment, is a type of debt instrument issued by governments, companies, corporations, or local authorities to raise money for projects and operations.
There are different types of bonds such as fixed-rate bonds, floating-rate bonds, and convertible bonds, to name a few.
Normally, bondholders receive a regular stream of income, referred to as a coupon or coupon payment, which is the annual interest rate paid on a bond, expressed as a percentage of the face value of the bond. Payments are made to bondholders at regular intervals from the issue date until the maturity of the bond, i.e., the end of the term of the bond.
Investments in bonds are considered to be lower risk than investing in equities and can provide stable returns. However, it is well-known that they typically generate lower returns over the long-term.
Cash and cash equivalents
Cash refers to money in the form of local and foreign currency, including coins, banknotes (paper money), and cash available in bank accounts and savings accounts.
Cash equivalents are highly liquid investments that can be readily converted into cash – in less than 90 days. Their market price should be available and not be subjected to significant price fluctuations. In addition, they should be easily sold in the market, meaning demand for these types of investments should be high.
Examples of cash equivalents are: Treasury bills, marketable securities, commercial paper, and money market funds.
In short, cash and cash equivalents can be easily accessed at any time.
This type of asset class is considered the safest investment vehicle. But as is the case with investments, the lower the risk, the lower the return on the investment. Therefore, cash and cash equivalents offer lower returns than equities and bonds.
Commodities
With regard to economics, the Oxford dictionary defines a commodity as: ‘A raw material or primary agricultural product that can be bought and sold.’
Nowadays, there is a huge variety of commodities[3] that are traded on approximately 50 commodity markets worldwide.
Basically, commodities can be categorised into four main types:
- Energy commodities such as crude oil, coal, and natural gas.
- Metal commodities, also referred to as hard commodities, including precious metals such as gold, platinum, and silver, as well as base metals like copper, aluminium, and zinc.
- Agricultural commodities, also known as soft commodities, comprise agricultural products such as wheat, cotton, corn, sugar, rice, and beans.
- Livestock commodities, also called soft commodities, including livestock such as cattle, sheep, and pigs.
Depending on numerous macro-economic factors, the prices of commodities can fluctuate to a great extend. Commodity markets can be subjected to extreme volatility due to extraordinary events, such as the Covid-19 pandemic during 2025. For example, the crude oil market had been hard hit by drastic falling oil prices during the first months of the pandemic.
Real estate
Real estate, commonly known as real property, includes land any permanent structures (natural or man-made) attached to it.
Property, commercial or residential, has a good record in providing financial returns that exceed inflation.
Investments can be done in local and foreign property.
Generally, investments in real estate are more stable than investments in equity, although real estate prices can also be volatile, rising and declining sharply.
Asset classes and diversification
Different asset classes enable investors to diversify their investments. Diversification is an investment strategy of reducing overall investment risk by spreading investments across different asset classes.
Each asset class comprises different risk levels, has different investment characteristics and cash flow streams, and performs differently in financial markets.
Basically, asset allocation, based on the strategy to diversify an investment portfolio by asset class, means to put the well-known advice into practice: ‘Do not put all your eggs in one basket.’
[1] See the following articles for more information on shares:
‘A General Overview of Public Company Shares in South Africa’
‘Ordinary Shares Explained’
‘Capital Gains Tax – From a South African Viewpoint’
[2] Refer to the article, ‘Bond Trading – Explained for Dummies’, for a detailed explanation of bonds.
[3] See the article, ‘Commodities Explained for Dummies’, for more information on commodities.
