Ownership Versus Loanership

An investment is something one purchases with the expectation of earning profit or income. Investments classify into two basic categories—ownership and loanership. Fundamentally, ownership involves the acquisition of an equity interest in an asset. Whereas, “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 a resource. Because asset values fluctuate with market conditions, investors may earn potentially higher returns than they would from lending their money. In essence, ownership investments represent equity. As such, they include business interests, stocks, mutual funds, real estate, commodities, collectibles, and precious metals. These investments ownership allow investors to participate in an asset’s economic growth.

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. Thus, “loanership” (debt) investments include savings accounts, money market funds, Treasury bills, corporate bonds, and certificates of deposit (CDs). Accordingly, with their guaranteed return of principal and income, loanership investments offer more safety and security.

Risk Versus Return

Ownership and loanership investments both have their respective merits. Yet, investors tend to favor loanership investments. On the whole, most investors are risk-avoiding. Consequently, they appeal to investments which offer more certainty.

Despite popularity, 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 may default on their loans. As a result,  lenders can lose their investment.