The most common form of genuine investing is a loan, or something similar. Suppose a man borrows $100 from a friend, with a verbal or written promise to pay back $101 next month. Provided the friend takes the promise seriously, he is an investor. He allows the borrower to use his $100, and expects him to pay one dollar for that use.
A man can lend money to the U.S. Government, receiving in return a savings bond on which is printed a table of exactly how much money the government will pay him after stated lengths of time, including both interest for the use of his money and repayment of the loan. In principle, buying a government bond is the same as lending money to a friend. The practical difference is the great financial strength and reliability of the U. S. Government.
Besides savings bonds, the Federal Government borrows by issuing other types of bonds, as well as notes and certificates. And state and local governments, business corporations, and other organizations also borrow money by selling bonds and notes.
When a person makes a savings or time deposit in a commercial bank, he is lending money to the bank, and the bank adds interest to his deposit. This is different from having a checking account in the same bank.
In buying a house or other real estate, the buyer usually borrows a large share of the price. He signs a mortgage an agreement that if he fails to pay interest and to repay the loan on time, the lender can take possession of the house. Anyone with sufficient cash can invest by lending on mortgages, but most mortgage money is furnished by financial institutions specializing in that sort of loan.
In a savings bank, savings and loan association or a credit union, an investor is usually called a member, and technically he does not lend to the institution. But the funds of these institutions are invested almost exclusively in loans, including mortgages on real estate, so that what a depositor-member owns is essentially a share in a group of loans. He receives income called "dividends," these being his share of the interest received by the institution on its loans. He is entitled to withdraw the same number of dollars that he has deposited, plus dividends, subject perhaps to delay if the institution is having trouble in collecting from its borrowers.
Sometimes a savings institution finds it necessary to foreclose a mortgage on a borrower's property. By that action the institution ceases to be a lender and becomes an equity owner of that property. But the institution sells the property as soon as is practical, thus again becoming a lender.
Preparing for the risk of financially stormy weather in the future is oftentimes done better by carrying insurance than by saving and investing. Life insurance is primarily a precaution against possible loss of income or extra expense that will occur if the insured person dies. At least part, and perhaps all, of the cost, called a premium, is an expense. But many policies have a cash surrender value, an amount recoverable while the insured person is living, and to that extent a life-insurance premium is an investment.
If you've ever heard the saying "you have to spend money to make money," you'll understand why loaning to others can result in more money in your wallet in the end. These investments often take many years to mature, however, so if you're looking for a quick buck you might consider other investment options.