Asset Classes and Financial Markets
The main asset classes
Cash and money-market instruments (Treasury bills, certificates of deposit, commercial paper) offer low volatility and high liquidity with modest return. Bonds are loans to governments or companies: coupon, maturity, credit risk, interest-rate risk and a defined claim in the capital structure. Equities give residual ownership - voting rights, dividends at the board's discretion, and the last claim on assets. Property can be held directly (illiquid, high transaction cost, valuation lag) or indirectly through listed vehicles such as REITs. Alternatives - commodities, hedge funds, private equity, infrastructure, collectibles - add diversification but bring illiquidity, opacity or high fees. Commodities produce no income, so returns come purely from price movement.
Market structure
Primary markets raise new capital; secondary markets provide liquidity and price discovery. Trading is exchange-based or over-the-counter. Market makers quote two-way prices, and the bid-offer spread is a real cost. Settlement is typically T+2 for equities in many markets. Short selling borrows securities to sell now and buy back later.
Trap: preference shares are legally equity but behave like debt (fixed dividend, priority over ordinary shares); convertibles are hybrids of bond and equity; a property fund's published valuation may lag market reality.
Rule of thumb - the seniority ladder: secured debt → senior unsecured debt → subordinated debt → preference shares → ordinary shares. The higher you climb, the greater the risk and the higher the expected return.
Example: on liquidation, secured bondholders are paid before trade creditors and ordinary shareholders - which is why the same company's bonds usually yield less than its equity is expected to return.