Investment assets in the financial markets are securities designed to generate profits. They are grouped in categories known as asset classes, and might be divided into stocks, bonds, commodities and currencies. Each asset class tends to react differently to a similar piece of economic news, and therefore by combining multiple investment assets in one portfolio, a combination of investments held, an investor is mitigating risk exposure. In addition to being grouped by broad financial components, investment assets can be categorized based on detailed characteristics, including equities that trade in a similar industry such as energy.
There are various types of investment asset categories, but all are used to enhance an investment portfolio. Stocks that trade in the financial markets fall under the equities group, while bonds are categorized as fixed-income investments. Real estate is a type of hard asset because it is a tangible item, although some properties trade as a value in an index known as a Real Estate Investment Trust in the stock market. Commodities represent an umbrella asset class under which various investment assets trade, including oil, gas and agricultural products.
By combining asset classes that are uncorrelated to one another in a portfolio, an investor is diversifying his exposure to the markets. Uncorrelated assets do not tend to trade in sync with one another. For example, if equities decline sharply, commodities will not necessarily follow suit, which might be able to prevent the portfolio from steeper losses. Different asset classes tend to react differently to the same piece of news or economic development, and by diversifying across multiple asset classes, an investor is mitigating risk.
In addition to real estate, hard assets might include other tangible products. This can include a manufacturing company's inventory and machines or an energy company's oil and gas reserves. These investments are listed on a company's balance sheet, which makes it possible to compare a company's investment assets to its liabilities.
Distressed assets represent another form of investment assets. These investments are created by a number of scenarios. They can be formed by land from a foreclosure on a private residence, inventory from failed companies or even stocks and bonds that were issued by a company that has been forced into bankruptcy protection. Since the holder or seller of distressed assets is often in a dire financial situation, the assets typically can be purchased by the investor at a bargain price.
During an economic downturn, distressed assets are more prevalent because companies are more likely to come into financial hardship. These opportunities might be difficult for an individual investor to identify and are risky because there is no guarantee that the asset values will rebound. Investors might want to turn to a professional, such as a mutual fund manager, who specializes in adding distressed assets in a portfolio for diversification.