# What Are Asset Classes? More Than Just Stocks and Bonds

> **Definition**
>
> An asset class is a category of financial instruments with common characteristics and bound by the same regulations.

## What Is an Asset Class?

An asset class groups [investments](https://www.investopedia.com/terms/i/investment.asp) that have similar attributes, behave similarly in the market, and are subject to the same regulations. An asset class contains securities that often behave similarly to one another in the marketplace.

Common asset classes include equities, fixed income, commodities, and real estate.

### Key Takeaways

*   Equities, fixed income, cash and cash equivalents, real estate, commodities, and currencies are examples of asset classes.
*   There is usually very little correlation and sometimes a [negative correlation](https://www.investopedia.com/ask/answers/040815/how-should-i-interpret-negative-correlation.asp) between different asset classes.
*   Financial advisors focus on asset class as a way to help investors diversify their portfolios.

![ Asset Class](https://www.investopedia.com/thmb/3yGWdVlWDk3urG49UWEhGSiIYkI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/assetclass_sourcefile-Final-718dadc60705471094ea684bec0cee1d.jpg)

*The three main asset classes are equities (stocks), fixed income (bonds), and cash equivalents or money market instruments. — NoNo Flores / Investopedia*

## Understanding Asset Classes

There is usually very little correlation and sometimes even a negative correlation between different asset classes. This characteristic is important and necessary for investors.

That's because if all asset classes' price movements moved in the same direction at the same rate, then investors could suffer great financial loss in dropping markets.

Historically, the three main [asset](https://www.investopedia.com/terms/a/asset.asp) classes have been [equities](https://www.investopedia.com/terms/e/equity.asp) (stocks), [fixed income](https://www.investopedia.com/terms/f/fixedincome.asp) (bonds), and [cash equivalents](https://www.investopedia.com/terms/c/cashequivalents.asp) or money market instruments.

Most investment professionals consider real estate, [commodities](https://www.investopedia.com/terms/c/commodity.asp), [futures](https://www.investopedia.com/terms/f/futures.asp), other financial [derivatives](https://www.investopedia.com/terms/d/derivative.asp), and even [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp) to be asset classes.

Investment assets include both tangible and intangible instruments that [investors](https://www.investopedia.com/terms/i/investor.asp) buy and sell for the purposes of generating additional income, on either a [short-](https://www.investopedia.com/terms/s/shortterm.asp) or [long-term basis](https://www.investopedia.com/terms/l/longtermassets.asp).

Financial advisors view [investment vehicles](https://www.investopedia.com/terms/i/investmentvehicle.asp) according to their asset classes for [diversification](https://www.investopedia.com/terms/d/diversification.asp) purposes.

Each asset class is expected to reflect different risk and return investment characteristics and perform differently in any given market environment. Investors interested in maximizing return often do so by reducing portfolio [risk](https://www.investopedia.com/terms/f/financialrisk.asp) through asset class diversification.

Financial advisors help investors diversify their [portfolios](https://www.investopedia.com/terms/p/portfolio.asp) by combining assets from different asset classes that have different cash flow streams and varying degrees of risk.

Investing in several different asset classes ensures a certain amount of diversity overall. Diversification reduces risk and increases the probability of earning a positive return.

> **Important**
>
> The main asset classes are equities, fixed income, cash or cash-equivalent securities, and commodities.

## Types of Asset Classes

The most common asset classes are:

### Cash and Cash Equivalents

Cash and cash equivalents represent actual cash on hand and securities that are similar to cash. These investments are considered very low risk since there is little to no chance of losing your money. The consequent peace of mind means the [returns](https://www.investopedia.com/terms/r/return.asp) are also lower than those of other asset classes.

Examples of cash and cash equivalents include cash parked in a [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp) as well as U.S. government [Treasury bills (T-bills)](https://www.investopedia.com/terms/t/treasurybill.asp), [guaranteed investment certificates (GICs)](https://www.investopedia.com/terms/g/guaranteedinvestmentcontract.asp), and [money market funds](https://www.investopedia.com/terms/m/money-marketfund.asp).

Generally, the greater the risk of losing money, [the greater the prospective return](https://www.investopedia.com/terms/r/riskreturntradeoff.asp).

### Fixed Income

Fixed income securities offer investors a fixed income stream. You buy a bond (lend money) and, in return, receive set payments of interest every year until the security's [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp). When the security matures, the money you initially invested is paid back to you.

Government and corporate [bonds](https://www.investopedia.com/terms/b/bond.asp) are the most common types of fixed-income products. The government or company pays you [interest](https://www.investopedia.com/terms/i/interest.asp) for the life of the loan, with rates varying depending on [inflation](https://www.investopedia.com/terms/i/inflation.asp) and the perceived risk that they won’t make good on the loan.

The risk of certain governments [defaulting](https://www.investopedia.com/terms/d/default2.asp) on their bonds is very low, so they pay out less. Conversely, some companies risk going bust and need to pay investors more to convince them to lend their money.  

### Equities 

When people talk about equities, they are usually speaking about owning [shares](https://www.investopedia.com/terms/s/shares.asp) in a company. For companies to expand and meet their objectives, they often sell slices of ownership to the general public in exchange for cash.

Buying these shares can be a great way to profit from the success of a company.

There are two ways to make money by investing in companies:

*   The company may pay a cash [dividend](https://www.investopedia.com/terms/d/dividend.asp)
*   You sell the shares for more than you paid for them

The market can be [volatile](https://www.investopedia.com/terms/v/volatility.asp), though. Share prices are known to fluctuate, and some companies may even go bust.

### Commodities

Commodities are basic goods that can be transformed into other goods and services. Examples include metals, energy resources, and agricultural goods.

Commodities are crucial to the economy and, in some cases, are viewed as a good [hedge](https://www.investopedia.com/terms/h/hedge.asp) against inflation. Their return is based on [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp) dynamics rather than profitability.

Many investors invest indirectly in commodities by buying shares in companies that produce them. However, there is also a huge market for investing directly, whether that is actually buying a physical commodity with the view of eventually selling it for a profit or investing in futures contracts.  

> **Fast Fact**
>
> Each asset class carries a different level of risk and return and tends to perform differently from others in a given market environment.

## Alternative Asset Classes

Equities, bonds, cash or marketable securities, and commodities are the most [liquid asset](https://www.investopedia.com/terms/l/liquidasset.asp) classes and, therefore, the most quoted asset classes.

There are also alternative asset classes, such as [real estate](https://www.investopedia.com/mortgage/real-estate-investing-guide/), and valuable inventory, such as artwork, stamps, and other tradable collectibles.

Some analysts refer to an investment in [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp), [venture capital](https://www.investopedia.com/terms/v/venturecapital.asp), [crowdsourcing](https://www.investopedia.com/terms/c/crowdsourcing.asp), or cryptocurrencies as examples of alternative investments.. 

That said, an asset’s [illiquidity](https://www.investopedia.com/terms/i/illiquid.asp) does not speak to its return potential; it only means that it may take more time to find a buyer should you wish to convert the asset to cash.

## Asset Class and Investing Strategy

Investors looking for [alpha](https://www.investopedia.com/terms/a/alpha.asp) employ investment strategies focused on achieving alpha returns. Investment strategies can be tied to growth, value, income, or a variety of other factors that help to identify and categorize investment options according to a specific set of criteria.

Some analysts link criteria to performance and/or valuation [metrics](https://www.investopedia.com/terms/m/metrics.asp) such as [earnings-per-share (EPS)](https://www.investopedia.com/terms/e/eps.asp) growth, or the [price-to-earnings (P/E) ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp). Other analysts are less concerned with performance and more concerned with the asset type or class.

> **Tip**
>
> Investors are often advised to not put all their eggs into one basket and to invest in different asset classes to spread their bets and reduce risk.

## What Are the Most Popular Asset Classes?

The three main asset classes are equities, fixed income, and cash equivalents or money market instruments. Also popular are real estate, commodities, futures, other financial derivatives, and [cryptocurrencies](https://www.investopedia.com/what-teens-need-to-know-about-cryptocurrency-7152233).

## Which Asset Class Has the Best Historical Returns?

The [stock market](https://www.investopedia.com/terms/s/stockmarket.asp) has proven to produce the highest returns over extended periods of time. Looking at the S&P 500 from 1928 through the first quarter of 2025, the average annualized return was [9.96%](https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#toc-what-is-the-sp-500-index). Here's another comparison: If you'd invested $100 in the S&P 500 on Jan. 1, 1928, you would have had $982,817.82 in 2024. However, the same $100 invested in Treasury bonds for that period of time would have been worth only about $7,159.

## Why Are Asset Classes Useful?

They're useful because they can help investors diversify their portfolios to reduce risk and maximize returns. Investing in several different asset classes ensures a certain amount of investment diversity.

## The Bottom Line

An asset class is a grouping of investments that exhibit similar characteristics and that may be subject to the same rules and regulations. Equities, fixed income, commodities, and real estate are common examples of asset classes.

Asset classes can be used to diversify portfolios and reduce risk, as each class typically reflects different risk and return characteristics. Building a portfolio with asset classes that are not highly correlated with one another is an important concept for successful diversification.

> **Article Sources**
>
> 1.  New York University, Stern School of Business.“ [Historical Returns on Stocks, Bonds and Bills: 1928–2024](https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html).”