How share market compares to alternative asset classes

Aug 17, 2022

Overview

Share market has been around for a while, it has been a pillar for all economies since the very beginning. 

The share market is a traditional platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day. People often use the terms ‘share market’ and ‘stock market’ interchangeably.

The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

However, like with every industry, now we have alternatives to these traditional asset classes, calling it the new age of investing, “alternative asset classes”. An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and Peer to peer lending. Real estate is also often classified as an alternative investment.

Upside of alternate asset class 

Alternative investments offer greater portfolio diversification and lower overall risk with the potential for higher returns. As alternative investments become a larger part of the investing landscape and more available to different types of investors, they’re increasingly important to know about for both investors and current or aspiring investment professionals hoping to accelerate their careers.

How Stock market compares to aac 

Stocks 

? are securities that represent ownership in a company. 

Stock types include value, dividend, growth, small-cap, mid-cap, large-cap, domestic, foreign, and emerging. Here’s a quick rundown of each:

  • Value Stock: likely trades at a low price compared to its fundamentals
  • Growth Stock: earnings likely outgrow the market. Here we’ve made a comparison between Growth and Value Stocks.
  • Dividend Stock: pays periodic dividend payments
  • Small-Cap Stock: has market capitalization lower than $2 billion
  • Mid-Cap Stock: has a market capitalization between $2 and $10 billion
  • Large-Cap Stock: has market capitalization higher than $10 billion. Read our comparison between Small-cap, Mid-cap, and Large-cap stocks here.
  • Domestic Stock: a company in the country where the investor resides
  • Foreign Stock: a company in a different country than where the investor resides
  • Emerging Stock: a company in a developing country

Alternative assets

Alternative assets are less traditional and more un investment options. Alternative asset classes include commodities, real estate, collectibles, foreign currency, insurance products, derivatives, venture capital, private equity, and Peer to peer.

Risk involved in alternative asset classes 

Alternative investments tend to have high fees and minimum investments, compared to retail-oriented mutual funds and ETFs. They also tend to have lower transaction costs, and it can be harder to get verifiable financial data for these assets. Alternative investments also tend to be less liquid than conventional securities, meaning that it may be difficult even to value some of the more unique vehicles because they are so thinly traded.

Variability in stock market 

the extent to which data points in a statistical distribution or data set diverge—vary—from the average value, as well as the extent to which these data points differ from each other. In financial terms, this is most often applied to the variability of investment returns.

Overcoming Cons of aac 

Alternative investments such as private equity stakes are even making their way onto portfolios. The underlying assets of private equity funds are generally illiquid and difficult to value, which creates a challenge when offering them in defined contribution plans. Defined contribution plans provide liquidity and prices daily on investment options offered to plan participants. To overcome liquidity and pricing challenges, private equity firms are looking to offer private equity exposure via target-date funds and collective investment trusts.

Advocates of private equity as an option in 401(k) plans maintain that the average investor will now have access to the potentially higher returns that this type of non-traditional investment yields compared to the typical plain-vanilla options—like mutual funds and stock and bonds—from which they have to choose.

Bottom line

It’s safe to say that, with any kind of investment there’s always risk riding on it. By Knowing your risk appetite and determining your financial goal you can make the right choice for your asset class. Saying that, you should always have multiple asset classes in your portfolio to mitigate risk and get the best possible return.

Stock market indices are extremely essential in Portfolio management in the practice for anyone looking to grow sustainable wealth. However, it still requires a lot of market knowledge and skills to get it right and an individual has to dedicate time himself or resources to appoint a portfolio manager for the same. 

To save you the trouble you can choose to invest in Peer to peer platforms like lendenclub where you can still get consistent high returns on investment allocation done by AI. A P2P model involves diversification of your fund into several small loans to mitigate risk. 

You can register now on LenDenClub

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