Asset classes - Part 1 - Stocks, Bonds, Commodities and Currencies
There are several types of asset classes which group together investments with similar characteristics. However, each asset class also has its own particular features that it does not share with other asset classes. Most common asset classes are: equities, fixed income, real estate, commodities and currencies. Correlation between different asset classes within the same industry is common. However, asset classes in unrelated fields show very little correlation. Each asset class possesses a different level of liquidity; most liquid asset classes are equities, fixed-income securities, and commodities.
Sub-asset class
Asset classes can be subdivided into sub-asset classes; for example, commodities can be subdivided into lumber, metals, oil, etc. Sub-asset classes can be further subdivided into separate groups which show common characteristics while showing characteristics of the broad group at the same time. For example, metals can be subdivided into precious metals and industrial metals. Each group can be then divided even further to efficiently distinct between separate features of asset type. For example, precious metals can be divided into gold, silver and platinum.
Illustration 1.01
Illustration above shows a daily chart of continuous CFD on WTI oil. Price made a low of 33.67 USD on 2nd November 2020 and continued to rise until it reached a high of 85.39 USD on 25th October 2021.
Correlation
Some assets tend to show correlation. Such correlation can be positive or negative. Positive correlation means that two assets behave in a similar way. For example, when gold rises then mining stocks rise as well. Contrary to that, negative correlation describes such behavior in which assets move in the opposite direction to each other. For example, when USDEUR declines then WTI oil tends to rise.
Illustration 1.02
Illustration above shows the daily graph of Exxon Mobil Corporation which belongs to the oil mining and exploration sector. It made a low of 31.11 USD on 29th October 2020 and then continued to rise until 1st November 2021 when it reached a high of 66.08 USD. Positive correlation can be observed between CFD on WTI oil shown in Illustration 1.01 and Exxon Mobil Corporation stock.
Stocks
Stocks, also called equities, are normally issued by an eminent (company, state, etc.) as shares which give right of ownership to their holder. These shares are then sold by eminent (to investors) with the purpose to raise capital. Stocks are predominantly traded on stock exchanges and they can be either common stocks or preferred stocks. Common stocks entitle a shareholder to vote at shareholders´ meetings and to receive dividends being paid by a company. Preferred stocks differ from common stocks in that they usually come with limited or no voting rights at all. Though, preferred stocks have higher claims to dividends and distribution of assets by a company. This means that in case of liquidation of a company preferred stockholders have priority over common stockholders. In addition to that, preferred stocks can pay higher dividends than common stocks and because of that they are good for building passive income based on dividend payments which can be monthly or quarterly.
Bonds
Bonds are simply loans made by an eminent (borrower) which can be state, corporation, or any other legal entity. Bonds are considered fixed-income instruments because they come with interest payments being paid out to an investor. Owner of a bond is called debtholder while the issuer of a bond is called a creditor. Bonds are tradable assets and they have maturity. In addition to that, bonds come with risk of default. Because of that, higher yielding bonds usually come with higher risk of default. Bonds are great investment vehicles for building passive income, however, they generally underperform in terms of yield when compared to stocks, commodities and indices. Bond yield is negatively correlated to bond's price.
Commodities
Commodities are basic goods (such as gold, lumber, oil etc.) that are used in commerce. They are usually refined or used for production of other goods. Commodities can be traded on market exchanges where they must meet specified minimum standards like quality, weight, type, etc. Commodities are great speculative and anti-inflationary investment vehicles.
Illustration 1.03
Illustration 1.03 shows the daily chart of CFD on WTI oil. On 20th April 2020 due to the WTI oil crisis at Cushing, Oklahoma price plunged below negative 36 USD (-36 USD per barrel). Unfortunately, that is not depicted on the chart (chart depicts lowest value at 0.00 USD).
Currencies
Currency has the role of a medium of exchange for goods and services in almost all economies around the world. There are many different currencies worldwide, however, predominantly used currencies are U.S. dollar (USD), Euro (EUR), British pound (GBP), Yuan (CNY) Ruble (RUB), Yen (JPY). Relationships between currencies are highly intertwined making the currency market very complex and hard to predict. Central banks can influence currency rates through monetary policies such as interest rates and quantitative easing. Similarly, a government can impact currency rate by enacting fiscal policies. These policies can have an impact on spending, import, export, etc.; which will, in result, influence currency rate. In addition to all of that, some currencies exhibit positive or negative correlation with commodities such as gold, oil, etc.
Illustration 1.04
Illustration above shows the daily graph of EURUSD. It is observable that EURUSD made lows in March 2020 and then continued to rise towards November 2020. Only a month later in April 2020 oil bottomed out and then started to rise in tandem with EURUSD (depicted in Illustration 1.03).
Asset Classes - Part 2 - Cryptocurrencies, ETFs, CFDs
Modern technology along with financial evolution brought rise of new asset classes such as cryptocurrencies, exchange traded funds (ETFs), contracts for difference (CFDs) and options. These new financial instruments represent alternative investment to stocks, bonds, commodities and currencies. Additionally, some features within these products can help an investor to diversify portfolio, trade short and use leverage with ease of a few mouse button clicks.
Cryptocurrencies
Cryptocurrency is simply digital currency. Most cryptocurrencies are based on blockchain technology which acts as a distributed ledger that is run by a large number of computers that comprise decentralized structure. Normally, cryptocurrencies are not issued by central authorities (however, central banks around the world currently work on digital form of fiat currencies). Cryptocurrencies are encrypted by cryptographic methods which makes them very difficult to counterfeit and double-spend. These assets are considered to be more volatile when compared to stocks, bonds, commodities and fiat currencies. Another defining feature that sets cryptocurrencies apart from other assets is that they are traded non-stop (24 hours a day, including weekends). Most popular cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), Ripple (XRP), Dogecoin (DOGE).
Illustration 1.04
Picture above shows the monthly chart of BTCUSD (Bitcoin in USD). It is very easy to spot unbelievable growth of more than 862 000 % between August 2011 and November 2021.
Exchange traded fund (ETF)
Exchange traded fund is a type of security that is publicly traded on a stock market exchange and which tracks an index, stock, commodity, or other asset. Exchange traded funds can track either one asset or group of assets. This allows an ETF to be structured in such a way that it can reflect performance of a particular economic sector.
Illustration 1.05
Illustration above shows the daily graph of JETS ETF which is an airline exchange traded fund. It has exposure to airline manufacturers, airline operators, airports and terminal services.
Contract for difference (CFD)
Contract for difference is exchange traded security that is cash-settled and which does not include delivery of goods. It simply pays the difference between the opening price and closing price. CFDs copy the price of other securities and they can be traded short, and also on margin. However, usually higher fees are associated with CFDs when compared to stocks, bonds, currencies and commodities.
Illustration 1.06
Depiction above shows the monthly graph of CFD on USOIL.
DISCLAIMER: This content serves solely educational purposes.
There are several types of asset classes which group together investments with similar characteristics. However, each asset class also has its own particular features that it does not share with other asset classes. Most common asset classes are: equities, fixed income, real estate, commodities and currencies. Correlation between different asset classes within the same industry is common. However, asset classes in unrelated fields show very little correlation. Each asset class possesses a different level of liquidity; most liquid asset classes are equities, fixed-income securities, and commodities.
Sub-asset class
Asset classes can be subdivided into sub-asset classes; for example, commodities can be subdivided into lumber, metals, oil, etc. Sub-asset classes can be further subdivided into separate groups which show common characteristics while showing characteristics of the broad group at the same time. For example, metals can be subdivided into precious metals and industrial metals. Each group can be then divided even further to efficiently distinct between separate features of asset type. For example, precious metals can be divided into gold, silver and platinum.
Illustration 1.01
Correlation
Some assets tend to show correlation. Such correlation can be positive or negative. Positive correlation means that two assets behave in a similar way. For example, when gold rises then mining stocks rise as well. Contrary to that, negative correlation describes such behavior in which assets move in the opposite direction to each other. For example, when USDEUR declines then WTI oil tends to rise.
Illustration 1.02
Stocks
Stocks, also called equities, are normally issued by an eminent (company, state, etc.) as shares which give right of ownership to their holder. These shares are then sold by eminent (to investors) with the purpose to raise capital. Stocks are predominantly traded on stock exchanges and they can be either common stocks or preferred stocks. Common stocks entitle a shareholder to vote at shareholders´ meetings and to receive dividends being paid by a company. Preferred stocks differ from common stocks in that they usually come with limited or no voting rights at all. Though, preferred stocks have higher claims to dividends and distribution of assets by a company. This means that in case of liquidation of a company preferred stockholders have priority over common stockholders. In addition to that, preferred stocks can pay higher dividends than common stocks and because of that they are good for building passive income based on dividend payments which can be monthly or quarterly.
Bonds
Bonds are simply loans made by an eminent (borrower) which can be state, corporation, or any other legal entity. Bonds are considered fixed-income instruments because they come with interest payments being paid out to an investor. Owner of a bond is called debtholder while the issuer of a bond is called a creditor. Bonds are tradable assets and they have maturity. In addition to that, bonds come with risk of default. Because of that, higher yielding bonds usually come with higher risk of default. Bonds are great investment vehicles for building passive income, however, they generally underperform in terms of yield when compared to stocks, commodities and indices. Bond yield is negatively correlated to bond's price.
Commodities
Commodities are basic goods (such as gold, lumber, oil etc.) that are used in commerce. They are usually refined or used for production of other goods. Commodities can be traded on market exchanges where they must meet specified minimum standards like quality, weight, type, etc. Commodities are great speculative and anti-inflationary investment vehicles.
Illustration 1.03
Currencies
Currency has the role of a medium of exchange for goods and services in almost all economies around the world. There are many different currencies worldwide, however, predominantly used currencies are U.S. dollar (USD), Euro (EUR), British pound (GBP), Yuan (CNY) Ruble (RUB), Yen (JPY). Relationships between currencies are highly intertwined making the currency market very complex and hard to predict. Central banks can influence currency rates through monetary policies such as interest rates and quantitative easing. Similarly, a government can impact currency rate by enacting fiscal policies. These policies can have an impact on spending, import, export, etc.; which will, in result, influence currency rate. In addition to all of that, some currencies exhibit positive or negative correlation with commodities such as gold, oil, etc.
Illustration 1.04
Asset Classes - Part 2 - Cryptocurrencies, ETFs, CFDs
Modern technology along with financial evolution brought rise of new asset classes such as cryptocurrencies, exchange traded funds (ETFs), contracts for difference (CFDs) and options. These new financial instruments represent alternative investment to stocks, bonds, commodities and currencies. Additionally, some features within these products can help an investor to diversify portfolio, trade short and use leverage with ease of a few mouse button clicks.
Cryptocurrencies
Cryptocurrency is simply digital currency. Most cryptocurrencies are based on blockchain technology which acts as a distributed ledger that is run by a large number of computers that comprise decentralized structure. Normally, cryptocurrencies are not issued by central authorities (however, central banks around the world currently work on digital form of fiat currencies). Cryptocurrencies are encrypted by cryptographic methods which makes them very difficult to counterfeit and double-spend. These assets are considered to be more volatile when compared to stocks, bonds, commodities and fiat currencies. Another defining feature that sets cryptocurrencies apart from other assets is that they are traded non-stop (24 hours a day, including weekends). Most popular cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), Ripple (XRP), Dogecoin (DOGE).
Illustration 1.04
Exchange traded fund (ETF)
Exchange traded fund is a type of security that is publicly traded on a stock market exchange and which tracks an index, stock, commodity, or other asset. Exchange traded funds can track either one asset or group of assets. This allows an ETF to be structured in such a way that it can reflect performance of a particular economic sector.
Illustration 1.05
Contract for difference (CFD)
Contract for difference is exchange traded security that is cash-settled and which does not include delivery of goods. It simply pays the difference between the opening price and closing price. CFDs copy the price of other securities and they can be traded short, and also on margin. However, usually higher fees are associated with CFDs when compared to stocks, bonds, currencies and commodities.
Illustration 1.06
DISCLAIMER: This content serves solely educational purposes.
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