1. Safety. In common an investment paying 12% interest isn't as secure as one paying 6%, however it is doubtful if the 12% investment involves twice the risk.
If the income offsets the further risk or gives a reserve against which to write off losses when they ultimately come, then high yield investments justify themselves, and they do when they're chosen with intelligence, with facts at hand on the investment and when they're administered cautiously, as we will see.
Along with this general theory that there is certainly a fantastic deal of merit to investing in high yield opportunities, safety must be stressed. This leads us to the second characteristic of the investments we are going to examine.
2. Collateral or guarantees. A household owner may well show you his bank account and also prove that he owns his property no cost and clear, so that you conclude that he is really a good risk whose signature on a note is as very good as gold however it is far wiser for you to take a mortgage on his residence. Or if he has securities it really is greater to have him assign the securities to you than just to take his promise to pay.
If a dealer sells you a customer's conditional sales contract on an automobile he sold on which the customer is obligated to pay in time payments over a given number of months or years, it really is properly, if doable, to have the dealer guarantee the contract in case the customer defaults. Two folks are obligated to pay, and undoubtedly two are greater than 1.
3. Provision for effortless repayment. If somebody borrows $2000 from you at an appealing rate of interest and promises to repay it at the end of 12 months with 15% interest, the proposition on its face is a poor one. If he wants the $2000 now, what assurance is there that he will have it to repay in the finish of 12 months? Such a sum just isn't smaller. Does he intend to borrow from Peter to pay Paul in the finish of a year? In New York City a seemingly really substantial man did just this for years and got away with it until he died. That was over two years ago and also the creditors are left holding the notes.
Periodic, smaller payments are a sensible requirement, and it must be demonstrated that the debtor can make these payments out of his income when all of his obligations are taken into consideration, and these obligations should be identified.
4. Responsibility for payment. Some individual or individuals, or perhaps a corporation composed of really distinct people have to be obligated to pay within the kind investment we are talking about. Unimproved land on the edge with the city could possibly be a fine investment. Some day it might double or even triple in value, but what we're trying to emphasize is the type of investment in which there's an obligation on the portion of an individual or persons to pay a given amount at a given time or in time payments, and you as the investor must look to this individual or these persons to pay you on the due date.
5 .Liquidity. The longer a contract runs the less liquid it is and usually the much less desirable. You cannot get your funds out of it for a lengthy time, and then the small business or the small business climate may well alter. The individual who lent $10,000 in 1928 for 5 years in all probability had difficulty in collecting in 1933. A demand note is undoubtedly preferable to a 5 year note. You may have need to have for the funds sooner than you thought after you produced the investment, and for anyone who is tied up for 5 years you cannot get your funds back. Possibly far better opportunities will present themselves. Stay as liquid as possible.
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