Navigate Up
Sign In
So many types of investments! What’s what?

So many types of investments! What’s what?

Posted on: December 14, 2011
Author: Staff

When it’s time to invest there seems to be countless options. To add to the confusion there are also financial products that combine individual investments into one, such as mutual funds. One way to get a handle on investments is to understand what category or class an investment belongs in. This is typically called an “asset class.” The investments within each asset class share certain characteristics. By understanding these characteristics, you can understand which types of investments will work best for you.

There are three main investment asset classes: cash and equivalents, fixed income, and equities. Each has their own advantages and disadvantages, and they each have different risks associated with them.

Here are the three main asset classes and their characteristics:

Cash and Equivalents

Cash and equivalents are the most basic type of investment. They’re simply an agreement between you and another party, usually a financial institution. You provide them with your money, and they promise to pay back your money with interest at a later date. It’s much like a loan but now you are the bank and the bank is the borrower.

The most common type of cash investment is a Guaranteed Investment Certificate (GIC). GICs are widely available at all banking financial institutions. They normally are for terms of one to five years. The interest rate you receive on your investment is pre-determined. Cash and equivalents are the least volatile of the asset classes since you know in advance what your return will be. Historically this asset class has the lowest expected return, which is due to their stable nature.

Fixed Income

A fixed income investment is similar to a cash investment in that there is interest paid on the investment, but there is further potential for gain or loss.

The most common fixed income investment is a bond. A corporation or government will issue a bond. An investor purchasing the bond is entitled to receive their initial investment back when the bond matures, plus interest payments in the mean time. The interest payment is called a coupon and is usually paid every six months. The coupon rate is determined when the bond is issued and will not change in the bonds’ lifespan.

Where a cash investment is an agreement between the investor and a financial institution, a fixed income investment is an agreement between the issuer and the security (bond) holder. An investor holding a bond can sell it before it matures to another investor. This is where there is potential for further gain or loss. Bond prices can change based on changes in interest rates and changes in the credit quality of the issuer.

Among the three asset classes, fixed income falls in the middle in terms of both expected returns and the volatility (ups and downs) of those returns.

Equities

Probably the most talked about investments are equities, most commonly known as stocks. A stock is a security that signifies ownership in a company. That ownership represents a proportional share of a company’s assets and earnings.

The most common type of equity investment is a common share and entitles the shareholder to vote at shareholders’ meetings and receive dividends (a portion of the profits that doesn’t go back into the company).

Common shares are traded on stock exchanges and their values are determined by what other investors are willing to pay for them. An investor’s return from holding equities is determined by the value of the shares on the stock exchange as well as any dividends received.

Equities are the most volatile of the three asset classes but also have historically provided the highest return. Since the prices of stocks can change so quickly, up and down, they require a longer term outlook in order to reap their benefits.

GlassdooreSSENTIAL Accessibility™Diversity and InclusionATB Listens

About ATB | Contact Us | Find a Branch or ABM | Current Rates | Privacy and Security | Legal | Code of Conduct | Site Map | Vendor Resources

2017 ATB Financial. All rights reserved. ®ATB Financial is a trade name/registered trademark of Alberta Treasury Branches.

ATB Financial