A debt investment is an investment in a firm through the purchase of a debt instrument as opposed to conventional equity investment in companies through buying common or preferred stock. Debt investments also include situations in which private investors finance debt products more commonly offered by banks or lenders.
Investing in debt has existed since Biblical times, notes the "Invest in Debt" website. What has changed in the 21st century is that more individual investors realize opportunities to profit from debt instruments previously offered by large banks or corporations. Rather than investing through acquisition of ownership in a firm or project, debt investors seek to profit from financing costs accepted by individuals and businesses willing to pay financing fees to obtain immediate access to cash.
Bonds are one of the most common and obvious examples of a debt investment. Organizations issue bonds as a financing alternative to offer shareholders part ownership. Investors buy bonds with guaranteed repayment at a particular interest rate. Corporations with high credit ratings usually pay less interest to bond holders because of their credibility. Growth companies or those considered more risky to bondholders pay higher interest yields on bond, presenting a higher risk, higher reward scenario for debt investors.
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Other Debt Investments
Other common debt investments include tax liens, real estate contracts, car loan notes, and owner-financed mortgages, according to "Invest in Debt." A pawn shop is also labeled a debt investment as is any investment set up with a promise of future cash flow in exchange for a purchase of a debt instrument in the current market. During strong periods in real estate, private investment groups are often popular. These are privately funded mortgage investment groups that typically fund more risky loans for real estate developers and home buyers in exchange for liens against the property.
Unique Characteristics of Debt Investments
Investing in debt is quite different from buying CDs or investing in stocks. Debt investors are often much more active than stock investors and have to carefully study and learn about the debt instruments they invest in, according to "Invest in Debt." Debt investments are often considered unconventional by people that consider investing to mean buying equities or other conventional profit-generating investments. When entering the debt investment arena, it is a good idea to learn from veterans in the industry and to start conservatively.