Types Of Assets
What are the different types of asset?
The four main types of assets are cash, fixed interest, property, and equities or stocks and shares.
What is cash?
In terms of assets; cash, or sterling, or deposit-based accounts, are really a safe haven for money, much like a bank or building society, where your money will just accumulate and never go down.
What proportion of cash should I hold?
In terms of assets, many financial advisers will recommend the proportion of cash I should hold is at least three months expenditure in cash, or maybe as much as up to a whole year as expenditure in ready cash, just in case.
Is cash risk free?
The asset being cash isn't entirely risk free. Whilst it's true that your pile of pound coins will never go down, inflation may overtake the value of them. So for example, 100 pounds today won't buy the same amount of things that 100 pounds in 10 years time will buy.
What are gilts?
A gilt is a fixed-interest asset. Technically, a gilt is a loan from a government. So for example, if the UK government issue a gilt of 5%, you're really making a loan to the government of, say, £100; and in return, they'll pay you 5%, or £5, for each year that you hold it. Gilts are called gilts because originally, they were issued as gold: gilded securities. That's where the name "gilt" comes from.
What are bonds?
A bond is a fixed-interest asset. It's rather like a gilt, except it's not issued by a government, it's issued by a company. Companies will tend to issue gilts to raise money, for example, for research and development. So, you lend them your money, they use it to generate new products, and pay you in interest. Hopefully it's worth a little bit more by the time you come to cash it in too.
Why would I invest in bonds and gilts?
You'll invest in bonds and gilts if you wanted a little bit more risk or volatility than cash, but not as much risk or volatility as the stock market.
What are equities?
Equities are stocks or shares in a company. You exchange your money literally for a share in a company when you invest in an equity. How you then do, whether you make money or lose money on the equity, would depend on the fortunes of that company.
Why should I invest in stocks and shares?
In terms of types of assets, investing in stocks and shares can provide much higher returns than investing in cash or fixed interest assets. However those higher potential returns can sometimes have a price. If you invest in stocks and shares or equities you also have to be prepared for the equivalent downside. You could lose as much, if not more, than you make.
