Ownership investments are the types of investments where you own an asset or a company (or a piece of it) which can generate earnings. In this category belong stocks, real estate, and running your own business.
Stocks are shares of ownership in a company. Also called equities, these enable you to share in the profits of the company. When the company performs well, other investors will want to buy shares. This demand will increase the share price and give you profits if you decide to sell your shares. On the other end of the spectrum, if the company suffers losses, the value of your stock also goes down. If you decide to sell your stocks for fear that the stock price will plummet further, you end up losing money. Take note, however, that your “losses” do not become actual losses unless you realize those by selling your stock at a losing price. The stock market has its ups and downs and many investors have found that by riding out the rough periods, stocks that once performed poorly eventually rebound.
Real estate is also another kind of ownership investment. These are the other houses, lots, apartments, or other dwellings you acquire to rent or resell. Generally, your primary residence also appreciates in value over time but since this is fulfilling your basic need for shelter, it would not be a good idea to count it as an investment. Besides, the 2008 housing crisis showcased how a mortgage meltdown could devalue your home.
Running your own business is the third type of ownership investment. When you invest money and time in making your business grow, you are going to reap the benefits and rewards when it starts giving you profits. Your business can be a product or service that people want or need. Bill Gates and the late Steve Jobs gave the world products that made lives more convenient and in the process, amassing wealth for themselves.
Ownership investments are the most profitable kinds of investments but they are also the most risky. You stand to earn a lot when times are good but you also risk losing a lot if the business or company goes under.
Lending Investments
Lending investments are those where you act as the lender. That is, you lend your money in exchange for interest which will be paid to you sometime in the future. Your regular savings account, certificates of deposit, and bonds are considered lending investments.
When you put money in a bank, you’re essentially lending your money to them so that they can use it—to give loans to individuals and businesses, for example. In return, they will be paying you interest. Although the risk factor is very low, the problem with putting your money in the bank is that the interest rate is negligible. Most of the time, what the bank will pay you in interest will just get overtaken by inflation and taxes. So even if you have faithfully saved your money in the bank for a year, the interest won’t be enough for you to realize your dreams of wealth and a comfortable retirement.
Bonds refer to certificates of deposit, treasury bills, corporate junk bonds, and the like. They are called fixed-income securities because when you purchase a bond, you are lending your money to the government or private company issuing it. In return, you are given interest when the bond expires. Federal government-issued bonds are the safest since they are guaranteed by the Federal government. Although safe, the returns are not as high. Junk bonds from companies give higher returns but they are relatively riskier. If the firm folds, you end up not getting paid. Another downside of bonds is that if the company you bought the bond from earns huge profits, you won’t share in it. You will only be paid the value of your bond plus the interest agreed upon when you purchased it.
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