We’re starting a new series of articles on investing… you’ve asked for it, so ladies, here it is!  Gents… feel free to read along as well!

Investing can be boiled down to two scenarios:  You can be a lender, or you can be an owner.  Truthfully, you can dabble in both, but at the end of the day, those are the two big buckets you can choose from – all the fancy words, and products fall into these two categories.  So – what am I talking about?  I always say “give me a for example”… so, for example:

Are you a lender? You’re a lender when you invest in GIC’s (guaranteed investment certificates, more on this in another article!), a T-Bill (Treasury Bill) or a bond, issued by a company for example.  In all of those examples you are lending money to the bank, government, or company for an interest rate that you both agree to, and the promise that the borrower (bank, government or company) will provide you with your original investment, or principal, on a specific date.

Risks associated when you lend:

-       The company you lend to could go bankrupt, and you could lose part or all of your principal

-       Inflation could rear its ugly head, and the money is worth less; the purchasing power is lower than you thought.  If Inflation is very random to you, no worries, we’ll get into that later.  But think of how, over time, the value of money changes, and the purchasing power, isn’t what it used to be… don’t get hung up on this, power through… so as inflation rises, the purchasing power of that same dollar decreases.

-       Finally, another “risk” is that, say you had a bond with a little company, and they experienced GREAT success in the years you held that bond – as a lender, you don’t get to benefit financially in that success, you are only given what was set up in the contract, the same interest rate, and your principal at the agreed-upon date.

Are you an owner? You’re an owner when you invest is some asset, such as stock in a company or real estate.  In these cases you have the chance to earn profit.  Say you own 100 shares in RIM (the Waterloo-based company that created the Blackberry!).  RIM is a very big company, so those 100 shares are a tiny portion, but that is your piece of ownership in the company.  Owning such shares, makes you a shareholder, and with that comes the privileges of earning dividends (income paid to shareholders; for example, if a company pays an annual dividend of $4/share, and you have 100 shares, your dividend payment would be $400!).  Ok, back to the story – also, if the company grows and is more profitable (which you hope when you own shares), you benefit, as your shares become worth more.  Alternatively, if RIM falters, and as a company, is worth less, so too are your shares.

Real estate is the same, and most of us understand how that works.  You hope to buy low, and sell for more – or buy and rent an income property for more than the monthly/annual expenses.  Given our current economy, we understand how real estate can be sensitive to its surroundings, and we know that real estate is not a sure thing.

There are many other ways to “own” – such as starting your own small business, or investing in another person(s) small business.  These can be very profitable, but also can be risky – doing your homework is essential!

A major risk to ownership, when speaking about stocks, is that with an opportunity for greater return there is an opportunity for greater risk or downside.  Investing in the short term is very risky, and the market can fluctuate from moment to moment, based on anything from something that happens overseas to a “feeling” of negativity in the market.  Thus, if you are willing to be an Owner, you have to understand you will be living with some volatility; thus, you shouldn’t put “all of your eggs in one basket”.    Finally, the shorter the time period, the less likely ownership, or stocks will beat out lending, like bonds, historically speaking.  Meaning, your money will likely earn you more with stocks, the longer your investment horizon.  I’ll leave you with a little table that describes this idea, below, and of course, we aren’t finished yet!  More on investing in the days and weeks to come.

At the end of the day, nothing is guaranteed, but the founding principle remains – in every investment (lending or owning) there is a relationship between risk and reward. The more risk you are willing to take, the higher the return potential, but also a higher chance you don’t get all your money back, let alone making additional money, profit.  Hope this wasn’t horrifically confusing, there will be more articles to explain each part of investing, and as always – send us an email or comment if you have a specific question or concern!!  Happy Investing!