What Are the Different Types of Assets to Buy?
Understand the spectrum of assets available for purchase. Discover different investment avenues to grow your wealth and secure your financial future.
Understand the spectrum of assets available for purchase. Discover different investment avenues to grow your wealth and secure your financial future.
Assets are items of value that can increase in worth over time. Individuals acquire assets for building wealth, generating income, or preserving purchasing power. The decision to purchase an asset aligns with an investor’s financial goals and risk tolerance. Understanding diverse assets is foundational for financial planning. This article explores distinct asset categories individuals commonly consider.
Traditional financial assets primarily include stocks and bonds, which represent fundamental components of many investment portfolios. These assets are typically traded on established financial markets and offer different risk and return characteristics.
Stocks represent a share of ownership in a company. Stocks generate value through capital appreciation and dividends, which are periodic payments of a portion of the company’s earnings to shareholders. Dividends can be qualified or non-qualified, influencing their tax treatment; qualified dividends are generally taxed at lower long-term capital gains rates, while non-qualified dividends are taxed as ordinary income.
Individuals typically buy stocks through brokerage accounts. Alternatively, investors can gain exposure to a diversified portfolio of stocks through mutual funds or exchange-traded funds (ETFs), which pool money from many investors to buy a collection of securities. Stocks generally offer higher growth potential compared to bonds but also come with greater price volatility due to market fluctuations and company-specific performance. When selling stocks, any profit realized is subject to capital gains tax, which is categorized as short-term if the asset was held for one year or less, or long-term if held for more than one year.
Bonds represent a loan made by an investor to a borrower, which can be a corporation or a government entity. When an investor buys a bond, they are essentially lending money to the issuer in exchange for regular interest payments over a specified period. At the end of the bond’s term, known as its maturity date, the original principal amount is returned to the investor. Bond interest payments are generally taxable at the federal level, and sometimes at state and local levels. For instance, interest from municipal bonds is often exempt from federal income tax and, sometimes, state and local taxes for residents of the issuing state.
Common types of bonds include government bonds, such as U.S. Treasury bonds, which are considered to have minimal default risk, and corporate bonds, which are issued by companies to raise capital. Bonds are generally considered less volatile than stocks and are often utilized by investors seeking a steady stream of income or looking to preserve capital. However, bonds are subject to interest rate risk, where rising interest rates can decrease the value of existing bonds, and credit risk, which is the risk that the issuer may default on its payments.
Real estate as an asset class involves the purchase of land and any permanent structures attached to it. This tangible asset can provide both income generation and potential capital appreciation over time. Real estate investments typically offer a different risk profile compared to traditional financial assets, often being less liquid but potentially more stable.
One common way individuals invest in real estate is through direct ownership of residential properties. This can include purchasing a primary home, or acquiring rental properties such as single-family homes or multi-unit dwellings. Rental properties generate income through tenant payments and can appreciate in value. Owners of rental properties can often deduct expenses like mortgage interest, property taxes, and depreciation for tax purposes.
Beyond residential properties, commercial properties like office buildings, retail spaces, and industrial facilities also represent investment opportunities.
For those seeking exposure to real estate without the complexities of direct property management, Real Estate Investment Trusts (REITs) offer an alternative. REITs are companies that own, operate, or finance income-producing real estate across various property sectors. Investors purchase shares in REITs, similar to buying stocks, and receive dividends from the income generated by the REIT’s real estate portfolio. To maintain their tax-advantaged status, REITs are required to distribute at least 90% of their taxable income to shareholders annually.
REIT dividends are typically taxed as ordinary income. However, a special provision, Section 199A, allows for a deduction of up to 20% of qualified REIT dividends for non-corporate taxpayers. Real estate investments, whether direct or via REITs, are characterized by their tangibility and potential for stable income streams, but they can be less liquid than stocks or bonds.
Commodities are raw materials or primary agricultural products that are bought and sold, forming the basic building blocks of economic activity. These assets derive their value from their fundamental utility and scarcity. Investing in commodities can serve as a way to diversify a portfolio and potentially hedge against inflation, as their prices often move independently of traditional financial assets.
Common examples of commodities include energy commodities like crude oil and natural gas, and agricultural commodities, such as grains like corn and wheat, and livestock. The prices of these commodities are largely influenced by global supply and demand dynamics, weather patterns, geopolitical events, and economic growth.
Precious metals, primarily gold and silver, are a distinct subset of commodities often sought for their role as a store of value and a hedge during times of economic uncertainty or inflation. Gold, in particular, has a long history as a monetary asset and is often considered a safe haven asset. Investors typically gain exposure to commodities through futures contracts or through exchange-traded funds (ETFs) that track commodity indices. Individuals can also purchase physical precious metals, such as gold or silver bullion.
Gains from commodity futures contracts are generally taxed under Section 1256, which applies a “60/40 rule.” Physical precious metals and certain commodity-based ETFs are typically taxed as collectibles when sold, subject to a higher capital gains tax rate, which can be up to 28%. The inherent volatility of commodity prices due to their sensitivity to numerous external factors means they carry a higher level of risk compared to more stable investments.
Digital assets represent a newer class of assets that exist solely in digital form and often leverage cryptographic technologies for security and verification. The most widely recognized form of digital assets for the general public are cryptocurrencies.
Cryptocurrencies are decentralized digital currencies that utilize blockchain technology to secure transactions and control the creation of new units. Unlike traditional currencies issued by central banks, cryptocurrencies operate on a peer-to-peer network. Their decentralized nature and limited supply are often cited as reasons for their appeal. The Internal Revenue Service (IRS) generally treats cryptocurrency as property for tax purposes, meaning that selling, exchanging, or using it to pay for goods and services can trigger capital gains or losses, similar to stocks.
Prominent examples include Bitcoin and Ethereum. Digital assets, particularly cryptocurrencies, are characterized by their potential for high volatility, with prices often experiencing rapid and significant fluctuations. This makes them highly speculative investments, and their value can be influenced by market sentiment, technological developments, and regulatory news.
Another type of digital asset gaining recognition is Non-Fungible Tokens (NFTs). NFTs are unique digital assets that represent ownership of a specific item or content, such as digital art, music, or virtual real estate. Unlike cryptocurrencies, which are interchangeable, each NFT is unique and cannot be replaced by another identical item. NFTs also leverage blockchain technology to verify authenticity and ownership. Both cryptocurrencies and NFTs often involve complex storage and security considerations, requiring users to manage digital wallets and private keys.
Collectibles and tangible valuables are assets that derive their worth from their rarity, historical significance, artistic merit, or sentimental value. Unlike financial assets, these items are physical objects that can be held and appreciated for their unique qualities. Their value is often subjective and can fluctuate based on market trends, authenticity, and condition.
Examples of such assets include fine art like paintings and sculptures, rare coins and stamps, classic cars, fine wines or spirits, and antiques. Investing in collectibles typically requires specialized knowledge to accurately assess an item’s authenticity, condition, and market value.
When collectibles are sold for a profit, the gains are typically subject to a higher collectibles tax rate for capital gains, which can be up to 28%. Furthermore, these assets often incur ongoing costs for storage, insurance, and maintenance. Collectibles are generally considered illiquid investments, meaning they can be difficult and time-consuming to sell quickly. This illiquidity, combined with storage costs and the need for expert valuation, makes them distinct from more easily traded assets.