Many investors think that diversification is buying different kinds of stocks.  That is true, but your financial investment strategy needs to diverisfy more broadly across different kinds of asset classes.  The following is a list of the most commonly used asset classes and how it fits in the bigger picture of having a diversified portfolio.

Stocks – Equities

The stock market, also known as the equities market, is probably the most well-known asset class.  Buying stocks is basically buying ownership in public companies.  This is pretty much the standard way to invest.  The popularity comes from the fact that it’s the easiest to understand.  Buying shares in companies like Coca-Cola, Micrsoft, or Google bring with it a familiarity that other asset classes don’t have.

Simply put, it’s more accessible to most people.  It’s a straightforward financial instrument in companies that we all know and are familiar with.  You can get a more in-depth introduction at stock market for beginners where you can get a brief overview with terms and definitions.  It’s a great place to start for anyone new to stocks.

Bonds – Debts

Bonds are usually paired with stocks when talking about investing.  This asset class is known to be the safer asset of the two.  Bonds are essentially an instrument that allows you to loan money to corporations and even to entire nations.  These are seen as relatively safe because in order for a corporation to not pay the loan back is if they defaulted and that is usually highly unlikely unless they are ready for bankruptcy.

Treasury Bills

Treasury bills are what the US government issues to raise money, so basically loaning the United States of America money.  They use this money to run their programs or pay back other debts.  Again, relatively safe unless the US goes bankrupt, which they might one day, but not anytime soon.

Commodity Futures, Stock Options and Derivatives

These are highly risky trading alternatives to the traditional stocks and bonds.  The advantage to these is that you have greater potential to make higher gains, but you equally have the same potentially for extraordinary losses as well.  New traders and investors should probably stay away from this investment strategy.

Cash – Savings

Of course, one of the safest places on earth for your money is in cash, but it’s not a recommended place for long term investing.  Keeping cash won’t grow your money.  In fact, the value might go down over time against inflation.  In any case, many people do choose to put it away in their mattress for a rainy day.

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