There are countless ways to save and invest so we group these into asset classes. For example, stocks for large companies are grouped into “Large Cap(italization)s” while stocks from developing countries are grouped into “EM” for emerging markets.
There is no natural market and so for a common definition of asset classes, companies publish daily indices to precisely identify the relative weights of each stock. The main benchmark index for US Large Caps is the Standard & Poor’s 500 while that for emerging markets is the MSCI EM. For most indices, the weights of individual companies are based on market capitalizations (value of all the tradable stocks a company has outstanding). The higher the demand for the stock of a company, the higher the market capitalization. Since demand is higher, liquidity is higher so it is easier to buy and sell these stocks.
There is no single asset class that always performs well – and the ones that do better for a few years can swing without warning. This return in variation is risk.
What do you think?