In the previous post, we have seen differences between the different classes of society. In this post, we are going to go into detail about what are the asset classes available at a person’s disposal to invest in. If we go on to classify assets they can be classified into a wide variety like Current assets, tangible assets, intangible assets, operating assets, non-current assets, non-operating assets, etc.
But all the assets can be classified into two types:
- Tangible assets: These are assets that are present in physical form and can be measured.
- Intangible assets: These are non-physical items that have value because they represent potential returns.
Now under these asset types, there are different asset classes. So now what are asset classes? Asset classes are a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations.
Tangible assets
So, under tangible assets, we have different asset classes as described below:
Real Estate: This is one of the most famous asset classes throughout the world. This can include residential, and commercial property as well as land. This asset class requires a huge upfront investment and can be illiquid or highly illiquid in nature. The risks associated with them are legal risks and price fluctuations.
Commodity: For this, we need to understand what we mean by commodity. A commodity is something that is can be exchanged with others or the same type of thing in commerce, they are generally used as raw materials to produce a product. Examples of commodities are oil, precious metals such as gold and silver, and agricultural products. Commodities can be soft, like agricultural products, or hard like metal, and energy. This asset class doesn’t need a huge upfront capital and the risk associated with this is the general risk of price fluctuation. This asset class is relatively liquid in nature compared to real estate.
Financial securities: Although Equities and bonds do not fit the traditional definition of tangible assets they are kept under tangible assets because they can be readily sold or converted and have monetary value that can be precisely measured. This asset class is liquid depending on the market on which it is traded, i.e. private or public. The risk associated with this asset class are legal and price fluctuations.
Collectibles: This can be anything whose value can be appreciated due to the supply and demand concept or sudden interest of people. Exotic watches, wines, and automobiles can be placed in this segment. The risk associated with this asset class is price fluctuations.
Apart from the above, some other things can be classified as assets based on their use, as mentioned in the previous post, i.e. assets that generate cash flow.
Intangible assets
Now under Intangible assets, we have the asset classes described below:
- Intellectual Property: These assets refer basically to some innovations, creations, etc. Examples of intellectual property include.
- Patents: These help in protecting a certain innovation from exploitation by others.Trademarks: these could include, brand names, logos, and slogans.
- Copyrights: These cover creative works like books, music, and software.
- Goodwill: This represents the reputation and customer loyalty a company has built over time. It often arises from acquisitions and reflects the value of a strong customer base and positive relationships with stakeholders.
Now assets can also be classified into two types based on the ease of transaction, i.e. liquid and illiquid assets.
Liquid Assets
Liquid assets are the ones that can be bought and sold easily due to the platforms available for transactions and the ticket size or the amount. Equity, bonds, and commodities fit into this type.
Illiquid Assets
Illiquid assets are the ones that are not that easy to buy or sell due to the platforms available for their transaction or due to the ticket size. Real Estate and collectibles would fall under this type.
Starting with the different asset classes the highest reward-to-risk ratio is in equities, which means the rewards are high but the risks are also high. So what are the risks associated with equities? As you may know, equities are backed by businesses, so if the business goes bankrupt or goes into a legal blackhole it might destroy your wealth.
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