There are two primary ways that a person can invest in the market - you can either own something, or you can loan someone money. Admittedly there are other exotic strategies, however these are the two most common, and ones that investors should probably stick to.
The first way to earn money in the market is to own something. You could own a company, gold, or real estate. When you want to own part of a company, you can simply purchase stock in that company. Purchasing stock means you literally own a part of that company.
So let’s break this down further. When you own something, you can earn money in 2 primary ways:
1. By what you own being profitable - When companies are profitable, they can distribute those profits to the owners of their company (also called shareholders) in the form of dividends. If you own rental real estate, you can receive whatever rent is left over after mortgage payments.
2. By the value of what you own going up - The value of a company can go up or down, and this is reflected in the price of the stock of the company. The price of gold or real estate can go up, and you can profit if you choose to sell it.
Now that you know about owning, what about loaning?
You can earn money by loaning money to others. When you deposit money into a savings account at the local bank, they pay you interest (admittedly at lower rates than in the past). By making this deposit, you are literally loaning the bank money. Another example of this is when you purchase a CD. Since you are locking in the loan for a longer period of time, the bank is willing to pay you a higher interest rate.
You can loan money to the government by purchasing T-Bills or TIPS, or to cities through municipal bonds. You are loaning these entities money, and in return they pay you interest. You can also loan companies money by purchasing their bonds.
As you can see, purchasing stock is the most common example of the Owning category, while purchasing bonds is the most common example of the Loaning category. If you want to invest in a company, you can chose to own part of it by purchasing stock, or loan the company money by purchasing a bond. If you want to invest in real estate, you can either own the real estate, or you can loan someone else money in the form of a mortgage.
Have you ever thought about investing in the form of Owning vs. Loaning? Does this help to simplify how you can earn money in the market? Please feel free to share your thoughts!
Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Connect on Google+. You can contact him at firstname.lastname@example.org, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”