What Are Assets in Trading?

There are many different assets like stocks, bonds, and currencies. Each asset has unique characteristics, presenting different opportunities over time. Understanding why investors choose certain assets and what drives their value can help traders find opportunities.

What Is an Asset?

Before diving into specific asset types, it’s important to define what an asset is in the context of financial markets. The term "asset" can have different meanings depending on where it’s used. For example, if you’ve ever reviewed a company's financial statement, you’ll see assets and liabilities listed. However, not all of those assets are things we can trade in the financial markets.

In financial trading, we focus on investment assets. Broadly defined, an investment asset is something purchased to either generate income or increase in value over time, or both. 

Investors essentially defer spending their money in the present, hoping for future returns. This leads to the essential concept of opportunity cost: the money invested could be used elsewhere, so investors must be compensated for giving up their current spending power.

Investors expect compensation for three primary reasons:

• Time Commitment: They need to be rewarded for waiting, since they forgo the use of their capital until a future date.
• Risk: There's uncertainty about the future value of their investment. Will it be worth more or less than the initial amount?
• Inflation: Over time, inflation can erode purchasing power. A dollar today may not buy as much in the future, meaning the real value of the return needs to account for inflation.

This compensation is often referred to as an investor's "required rate of return." It is the minimum return they expect to justify the investment of their money. If an investment no longer offers the potential to meet or exceed this return, investors are likely to move their funds to more attractive opportunities.

Asset Classes

So, what is an asset class? An asset class is a group of financial assets that share similar characteristics. Markets are typically divided into these classes, and similar assets are grouped together for easier analysis. Depending on who you ask, you may get slightly different lists of asset classes. However, the traditional ones include equities (stocks), bonds, property, commodities, and cash.

In recent years, some asset managers have expanded this list to include derivatives and even cryptocurrencies as separate asset classes. Changes in the economy or industry conditions can make certain asset classes more attractive, causing money to flow out of one class and into another, leading to price shifts. As a trader, anticipating these shifts or understanding their context can be an advantage.

For example, in times of economic uncertainty, bonds may become less attractive due to low yields, pushing investors into riskier assets like equities. If you can recognize these shifts in demand, you may be able to capitalise on them.

These are the asset classes most relevant to active trading:

• Equities (Stocks): Shares of ownership in companies.
• Bonds: Debt securities issued by governments or corporations.
• Commodities: Physical assets like gold, oil, and agricultural products.
• Currencies: Trading in foreign exchange markets (Forex).
• Indexes: Composite measurements of market performance.
• Cryptocurrencies: Digital assets like Bitcoin and Ethereum.

All of these assets can also be traded through various derivatives such as futures and options.