IOU

So far, we have looked into investing our money in a variety of ways. Last time we considered investing in some other stands in such a way that you have ownership to some extent. It may be such that you own most or all of a stand, but it may also be that you own a very small fraction of a stand. Regardless of the degree of ownership, it is still ownership.

Now, what if you could lend your pennies to a stand in order to help them get to a new level? Or what if your favorite stand wants to improve and build a bigger, nicer stand? Can you participate in this expected growth without taking on the risk of ownership?

Yes. You can lend money to the lemonade stand.

Of course, there might be a lemonade stand bank that will support these efforts, but there can be a lot of reasons a business would prefer to not take out a bank loan. An alternative that might make sense is for that business to issue a series of notes — think of them as IOU’s — to individuals willing to provide money for a specific project. This can be much less expensive than traditional bank financing, and it expands opportunities for businesses to obtain the capital needed to continue its growth.

So, your favorite lemonade stand has a specific focus to renovate its stand in order to serve more customers. They offer to write an IOU to anyone who wants to lend money for the project. Even better, they write the IOU for the dollar amount you give them plus an additional amount on top of the original amount! For example, if you give the stand (let’s call it the IOU Lemonade Stand) $1, the IOU Stand might offer to give you $1.25 in 12 months (your $1 plus an additional twenty five cents).

Of course, there is the risk (see? we can’t really get away from it) that the IOU Stand will not complete the project and thus not make more money. The business might shut down and never get going again. Perhaps another stand will buy the IOU Stand … once again, there are several different things that could happen.

However, this tends to be considered a safer investment because when a company closes up, debts are paid back first. Remember, this is a debt the IOU Stand owes to you. You may not receive the entire amount stated on the IOU, but before the owners get paid from the sale of the assets (think back to our early conversations — “you don’t have nothing”), lenders will be paid first.

Naturally, as we look to the real world, there are a number of other complexities to be considered. However, the basic concept is the same — the bond market, also known as the fixed income market, is essentially an IOU market. So when you are asked what your portfolio allocation is of stocks to bonds, think in terms of ownership and lending. There are a number of reasons to have a blend of each and that blend is something a financial advisor can assist you with, but this is the basic idea. Saving. Investing. Stocks. Bonds. If you keep these basic concepts in mind when discussing opportunities, you will have much more confidence in making decisions for yourself and your family.

Until next time,

~Jacqui O. ✨