Asset is something of value that can be converted to cash. Asset allocation is the spreading of money across these different asset classes or investment types. It is important to know the amount invested into each class and this depends on your goals, timeline, risk appetite. Asset allocation assists with stabilizing both risk and reward any time you invest. Each asset class responds uniquely to market conditions and the economy. The 3 major asset classes are:
A. Cash
When it comes to investing, cash extends to more than the physical paper money and coins. It also includes the money in your current account, savings account, fixed deposit accounts, and anything that can be converted into cash swiftly.
B. Stocks
Stocks are shares which are small pieces of a company bought in both public and private corporations. When the company is profitable, the buyer of these shares (shareholders) are rewarded by dividends declared by the company. Value of the stocks of profitable companies can increase, thus making your investment profitable. However, stocks are subject to market risk.
C. Bonds
Bonds are issued by large companies or the government who are in need to borrow money. Individuals can invest in these bonds for which they gain an interest. Bonds also have a maturity date on which bond issuers pay-back money to the investors. These bonds have credit ratings (AAA, BBB) which serves as a guide for investors for investing in these bonds.