Financial Foundations: Owning & Loaning
Hi! I’m Nick, and welcome to Financial Foundations. I’m going to cover several concepts of investing that may seem confusing and show you that they’re actually simpler than you think. Let’s talk about being an owner of your money rather than a loaner of your money.
So, when it comes to investing, what exactly is the difference between being an owner and a loaner? Well, let’s start out by talking about loaners since most people start out as that.
You very likely have a savings account open at your local bank, right? The reason that you would open a savings account is because you can earn interest on the money you deposit into it. The reason you earn interest is because you are technically loaning your money to the bank.
In turn, the bank then lends your money to other people who need to borrow it. However, the bank guarantees to pay you back with a little bit of interest. You risk is very low, therefore the interest received is also low.
So, what exactly is an owner then? Well, you invest your money into stocks, you are essentially buying shares of a company. A share, or a stock, is a small percentage of a company that a person owns. So, let’s say that there’s a company called… Nick Corp!
If Nick Corp has 100 shares and you buy 10 of them, you own 10% of the company. So, the more shares you buy, the more of the company that you own. You’re an owner. Clever, huh?
So, when the company makes a profit, each of its shareholders earns a percentage of it, depending on how many shares they own. And often overtime, the price for shares of profitable companies often go up in value, and so when you sell your shares you can make even more profit. Sounds pretty nice, doesn’t it?
So, what should you be then? An owner or a loaner? Well, it’s probably good to be both, but for the money that you won’t be needing for at least five years or longer, I really urge you to consider becoming an owner. Even though stocks may seem risky at times, in the long run if you buy shares of profitable companies, such as the big banks, Disney, or Apple, the rewards are much greater, sometimes two or three times greater than by simply just loaning your money to these same companies. In other words, it’s better to be an owner of the bank rather than a loaner to the bank.
There you go! You now have an idea of what it’s like to be an owner rather than a loaner. I’m Nick and thanks for joining me on Financial Foundations. See you next time!