Building Blocks

An asset class is a broad family of things you can invest in, grouped together because they behave in similar ways.

• Equity is ownership in businesses. When you own equity, you own a slice of a company and share in how well or badly it does. Think stocks and ETFs.
• Debt is lending rather than owning. You lend money to a company or a government, and in return they pay you interest over time and return the amount at the end. Bonds are the most common form.
• Commodities are physical goods like gold, silver, or oil. Their value comes from the material or goods itself and what price people will pay for it in the market.
• Real estate is property, both land and the buildings on it. You earn from it as its value rises over time, or through the rent it brings in.

You now know what an asset class is. In global investing, the most popularly talked about asset class is equity but you cannot buy “equity” as this is a concept, not a product.

Investment products are the specific instruments that give you exposure to the above asset class, like stocks, ETFs, and equity mutual funds.

In a nutshell, an asset class is what you want exposure to. An investment product is how you get that exposure.

In equity, there are three products which give you that exposure in a very different shape:

• A stock gives you direct ownership of one single company.
• An ETF gives you ownership of hundreds of companies at once, bundled together and traded like a single stock.
• A mutual fund also gives you exposure to a basket of companies, but bought and sold a little differently.

Two products can give you almost identical equity exposure, yet differ enormously in what they charge you, how much skill, knowledge, or time they demand, and how much control or flexibility you have over what sits inside. So choosing what to invest in and choosing which product to use are two separate decisions. Module 2 covers the comparison among these investment products, and which one is right for you.