What is an Investment Product?
Recently, I wrote about the financial ROI of Green Investing. Let’s drill down further…
In finance, an investment is a “thing” you buy with money for the purpose of getting both getting your money back, and getting more money in the form of “interest”, “capital appreciation” or both. This “thing” is a piece of paper called an Investment Product, also known as a Security.
The sale of securities is one of the most highly regulated industries in the U.S. The government agency in charge of these regulations is called the Securities and Exchange Commission (SEC).
The two main types of securities are Equity and Debt.
When you buy an “equity” investment product, you are purchasing a share of ownership in something. Let’s say you and a friend want to buy a rental property, and you agree to split the purchase cost, the ownership, and the profits 50/50. You then hold 50% of the equity in that property. The agreement you write up spelling out this ownership agreement is a type of equity security. Wall Street stocks are another form of equity security.
If instead, a bank loans you money to buy the property, you have actually sold the bank a debt security. The bank provides you with an amount of money, and you agree to pay them a certain amount of Interest plus pay back the original money (principal) over time.
In debt securities, the “buyer” of the debt product (in this case, the bank) doesn’t own the underlying asset, be it a company, property, etc. However, debt securities are often “secured” by the right of the lender to take property away from the borrower should the borrower fail to pay back the interest and the principal. Some debts are secured, and some are unsecured, and this factor influences the risk/reward picture. Wall Street bonds are another form of debt security.