An investment is something one purchases with the expectation of earning profit or income. Investments classify into two basic categories—ownership and loanership. Ownership involves the acquisition of an equity interest in an asset. Loanership entails the lending of funds to finance the debt of an individual, a company, or a government.
Ownership: When investors purchase ownership investments, they acquire all or part of an asset. Because asset values fluctuate with market conditions, investors may earn potentially higher returns than they would from lending their money. Ownership (equity) investments include stocks, mutual funds, real estate, commodities, collectibles, and precious metals.
Loanership: When investors lend money to a company or government, they receive income based on a set interest rate for a certain period of time. The lendee promises to pay back the original principal plus interest. Loanership (debt) investments include savings accounts, money market funds, Treasury bills, corporate bonds, and certificates of deposit (CDs).
Ownership and loanership investments both have merits. Ownership allows investors the opportunity to participate in an asset’s economic growth. However, loanership, with its guaranteed return of principal and income, offers more safety and security.
As a result, investors tend to concentrate more heavily on loanership investments. Still, the comparatively low risk of lending instruments accompanies itself with a commensurate low return. Therefore, a long-term risk of these seemingly safe investments is that they may grow too slowly to achieve financial goals. Also, in the worst cases, borrowers default on loans…causing lenders lose their investments.