Secured loans are based on a collateral asset such as the borrower’s property or financial account. The lender can take ownership of the collateral asset if the borrower fails to repay the loan.
Unsecured loans are based on creditworthiness of the borrower. Lenders usually rely on credit reports to assess creditworthiness. Credit card accounts and student loans are unsecured loans. Beware: Students can incur high debt by borrowing for extra years of college or to attend an expensive school.
The short-term investor typically lends money to an investment fund (money market fund), bank (certificate of deposit) or government (Treasury Bills) on the condition that the borrower promises to pay it back with a small reward (called “interest”) at a specified time no longer than 1 year.
Stocks are certificates of part-ownership in a company. Stockowners earn returns from dividends and capital gains. The expected long-term rate of return is an average annual rate of 7%.
REITs are real estate investment trusts that distribute 90% of the annual profit to shareholders. REITs earn profits from rental fees and real estate investments.
Bonds are contracts that guarantee scheduled payments of interest and repayment of the invested money. The expected long-term return is an interest rate of approximately 4%.
Investment funds are pooled investments, typically in stocks or bonds, which are owned by a group of investors. Shareholders earn profits from cash distributions by the fund and by selling shares of the fund at a higher price. Shareholders lose money if they sell shares at a lower price than paid to make the investment.
Mutual funds and ETFs are registered investment funds governed by the Securities and Exhange Commission (SEC.gov) and Internal Revenue Service (IRS.gov).
529 Plans, Coverdell ESAs and Roth accounts are portfolios of government-regulated, tax-deferred investments.
Homes are illiquid assets, meaning that they are difficult to sell quickly for cash. Owners earn a profit or loss at the time of sale.