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Understanding asset classes

Each asset class has different characteristics, in terms of their structure, potential returns and risks. It’s important to understand these characteristics so you can choose the investments that best suit your purpose.

Shares

A share is a part ownership of a company. You are literally buying a share in the company. You may receive dividends paid from the company’s profits and if the company’s profits and prospects grow, so will the value of your shares. Companies have limited liability which means you have no personal liability for the company’s debts and obligations. Equally, you have no guarantee of the return of your capital or income from your investment in the company.

‘Australian shares’ refers to the shares of companies listed on the Australian Securities Exchange and ‘international’ or ‘global’ shares refer to companies listed on overseas exchanges such as the New York or London Stock Exchanges. Some global companies, such as BHP Billiton, are listed on both Australian and international exchanges. Shares are generally considered growth assets which can fluctuate in value based on their own performance and broader market sentiment, but they are as diverse as the businesses, industries or regions in which they operate.

Fixed income

This is an investment that promises a particular return and the return of your capital, usually over a specified period. The level of return is compensation for the risk you take. The risk is the issuing organisation’s ability to pay back the promised return. Government and corporate bonds are examples of fixed income investments.

The most important thing to remember with fixed income investments is that any ‘guarantee’ depends on the issuer’s ability to pay and the quality of any underlying assets backing the investment.

Like shares, many fixed income investments can be traded on markets and their value can fluctuate depending on the perceived risk of the issuing organisation, as well as prevailing interest rates and outlook.

Property

Investing in buildings used for offices, industry, retail and residential can provide regular income as well as capital gains. Investing in property companies and trusts listed on stock exchanges effectively means investing in existing buildings, developing buildings, and managing the properties and related services for the businesses that lease them.

Infrastructure

Similar to property, investing in infrastructure such as roads, rail, seaports, airports and pipelines can provide regular income as well as capital gains. Similar to many property companies, infrastructure trusts and companies are often listed on public stock exchanges. Infrastructure usually requires large amounts of initial development capital with income returns generated over the long term.

What’s next?

  • Read about how Perpetual invests