Although not exhaustive, the following gives a basic overview—description, rationales for use, and specific risks—of the most common instruments and asset classes you’ll find in investment portfolios.1
By purchasing equity, you become part owner of the company of which you bought the equity. If an individual owns more than 50 percent of the equity or shares of the company, the individual is called a controlling shareholder of that company.
When we talk about investing in equities we usually refer to the listed equities that are being traded on an exchange. Investing in unlisted equities is called private equity (see ahead).
The main reason for buying equity is to become part owner of the respective company. This ownership gives two potential revenue streams: dividends (i.e., part of the profit) and share-price appreciation.
In the long run equities tend to outperform inflation.
Even though, as an asset class, equities tend to outperform inflation over time, the risks with regard to individual equities are rather high. Share prices (i.e., the price of equity) have a tendency to fluctuate quite a bit. This price uncertainty is a result of (a combination of) the many risks that we have discussed (e.g., market risk, business risk, currency risk if it concerns a foreign equity, country risk, etc.).
When selecting equity, asset managers take into consideration: