What Are Debt Investments
The concept of debt has been around for ages, and as long as there has been someone who has owed a debt, there has been someone who has owned that debt. Owning a debt can come with a certain amount of lucrative benefit - especially when you consider the interest you can earn.
While there are plenty of conventional equity investments to choose from - like stocks, bonds and real estate, there are also opportunities to earn dividends when you invest in debt.
Debt investing has long been the business of large banks. But new investment opportunities have made this a more mainstream option that’s permitted even small-time investors to get in on the game. Before you get started, however, it is wise to understand exactly what you’re investing in, what it means to actually ‘own a debt’ and where the smartest moves to make an investment are for your portfolio size.
What is a Debt Investment?
Debt investment is an investment made in a firm or project through the purchase of a large quantity of debt, with the expectation of being paid back plus interest. There are debt investments that include private investors such as financers for debt products, as well as the more commonly offered debt investments by banks and lenders.
Debt investments can be made on collections of corporate or private debts and include various kinds of debts. Before you invest in any sort of debt, it’s absolutely essential that you get information about a few things, including:
- What type of firm you’re investing in
- Where the firm acquired the debt
- Why they’re looking to sell
- What type of return you can expect to earn
Debt investing is often thought of as fixed income because borrowers are legally required to pay back a specified amount at predetermined intervals.
Debt Investment vs Equity Investment
There are two primary options at the core of all investments: debt instruments and equities. Equities are the things that you can own, such as stock or real estate. Debt instruments are things that you are expecting, but cannot actually produce at any given time, such as a bank certificate of deposit or municipal bond.
Examples of Debt Investments
There are a number of common types of debt investments that may prove worth the investment. Some common types of debt include:
- Tax liens
- Real estate contracts
- Car loan notes
- Owner-financed mortgages
- Student loans
The most common type of debt investment is a bond, made famous during times of war. Organizations - governments included - have sold bonds as a way to get citizen investment in the larger corporate structure. Investors can buy bonds with a guaranteed repayment at a determined interest rate. Bonds can be somewhat tricky, though, because corporations with higher credit ratings (which is ideal from a risk perspective, as a higher credit rating can better ensure you’ll get your investment back) will pay less interest to bondholders. Still, if you have a lower risk tolerance, you may be willing to make a bit less on the investment so you can feel more confident in getting your return.
The federal government has long been in the business of debt investment, and the treasury is at the forefront. The federal government provides the safest place for your debt investment with Treasury bonds, bills, notes and other government-backed securities. These are typically regarded as highly safe and trusted because they are backed by the United States Federal Government.
In addition to government investments and bonds, another trustworthy debt option to invest in is loans. Thanks to the highly-regulated nature of the loan process and the difficult process borrowers have to go through to even take out a loan, this can be a safe bet.
Is Debt Investing Right For You?
Debt investing is a complex process, and some advisors don’t recommend it as a first step for new investors. Speak with your financial advisor before getting started with debt investments. There are many alternative investment opportunities out there, and if debt investing is a good path for you, your financial advisor can help you get started.
Keep in mind that while debt investing can be less risky than some equity investment opportunities, you’re likely to earn lower returns. Debt investments can be a good strategy if you’re looking to achieve short-term goals (1 - 2 years), but may not be the best course of action if you’re not willing to do the research it takes to make a smart move.
How to Invest in Debt with Connect Invest
Debt investing can be a great way to diversify your portfolio and start creating a smart strategy that makes your money work for you. If you’re looking for investment opportunities and the idea of a short-term note appeals to you, check out Connect Invest’s opportunities today.