Kitchaloo.com

There are a large number of investment opportunities available to the public. For the most part however, they boil down into 5 different asset types. This article looks at each type in turn.

1. Cash
2. Bonds
3. Real Estate
4. Equities
5. Commodities

1. Asset Type: Cash

Cash is the least risky asset type. If you put you money into a savings account, you will not lose money. In fact you will generally earn some interest and thus are guaranteed to end up with more money than at the start.

Nevertheless, holding cash is not without risk. As explained here, inflation can affect holders of cash. If inflation is running at a higher rate than the interest rate you are receiving your money (including the interest you received) will be worth less than when you deposited it! Conversely if inflation is running at a lower rate than the interest rate your are receiving your money will be worth more than when you deposited it.

• Advantage: No capital risk.
• Disadvantage: Inflation affects the actual return.

2. Asset Type: Bonds

Bonds are a certificate of a debt on which the issuer (businesses, organisations, governmental bodies) promises to pay the holder a specified amount of interest for a specified length of time, and to repay the loan on its maturity.

It's important to note that the value of bonds on the open market changes. The value of bonds generally fluctuates depending on the interest rate environment. Broadly speaking, if interest rates (or more realistically interest rate expectation) rise, the value of bonds fall and visa versa.

• Advantage: Generally better interest rates than savings accounts
• Disadvantages: Inflation affects the actual return. Capital value can change.

3. Asset Type: Real Estate 

Real estate investment involves the purchase of commercial or residential property. Renting the property out provides the investor with a regular income. It is also possible to use leverage to potentially increase returns. Real estate, unlike cash or bonds, is not directly affected by inflation.

• Advantages: Not negatively affected by inflation. Rent can generate regular income.
• Disadvantages: Property requires active management. Real estate is an Illiquid market.

4. Asset Type: Equities

Equities are stocks, shares or (part) ownership of companies. Why own a part of company? Well, if the company does well the value of that part ownership may go up. Also companies sometimes return money to the owners by means of dividends, providing the owner with an income.

• Advantages: Not negatively affected by inflation. Dividends can generate a regular income. Equities are generally a liquid market.
• Disadvantages: De-materialisation can effect investor rationality. Can be complex to understand individual companies.

5. Asset Type: Commodities

Examples of commodities are coal, diamonds, wheat, wood, etc... The value of a commodity changes as it's supply and demand change. Investors are able to make money by selling the commodity in question for more than what they bought it for. The prices of commodities can go up or down of course.

• Advantages: Not negatively affected by inflation.
• Disadvantages: De-materialisation can effect investor rationality. No regular income generation.