An asset class is a category of financial instrument - these can be physical assets or financial assets. The instruments are grouped into asset classes based on whether they show similar characteristics, behave in the same way on the market, or are governed by the same laws and regulations.
To prevent the risk associated with focusing on one section of the market, many strategies recommend spreading trades out across a mix of assets. This is referred to as diversification (or diversifying). There is no guarantee that diversifying a portfolio will yield returns, but it may help reduce risk – if one asset class experiences a positive swing, it could outweigh the downward movement of another.
Assets are grouped together based on their financial structure. The traditional four types of asset classes are:
Many investors would put cryptocurrencies in their own asset class. In fact, there is no complete agreement on how many asset classes exist. Some people only identify three categories of assets - equities, fixed income and money market - while others use as many as five, which includes commodities and cryptocurrencies as their own classes.
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