Investments in debt offer investors a range of benefits compared to more traditional investment options. For one thing, debt tends to be safer than equity investments. Debt investments are secured by property, which serves as an insurance policy for repayment. However, debt investments do have a lower rate of return than equity investments.
The most common type of debt investment is bonds. These were first popular during wartime, when governments sought investment from their citizens. These securities promise repayments at a set interest rate for a certain length of time. These investments can be risky, however. If borrowers fail to make their payments, the courts may seize the assets of the company and pay back debt holders in full. If this happens, the management of the company must satisfy claims of the debt holders before they pay out the equity holders.
Debt investments can be complicated, and some financial advisors do not recommend debt investing as a first step for new investors. However, if you’re willing to take the risk and understand the risks involved, it may be a great strategy for you. You’ll be less likely to see a huge return, but it can be a good strategy for short-term goals. It’s important to do your research and get advice from a financial advisor to make sure you’re making the right choice.
Another advantage of debt is that the interest expense is tax-deductible. In most cases, debt investors can deduct interest expenses on their taxes. This makes the interest expense more comparable to the cost of equity. In contrast, earnings on stocks are taxed.