When looking at investment basics, bear in mind that "investment" is a word often used merely as an excuse to justify buying something that the buyer cannot afford. Some­times it is hard to draw the line; but to play safe, let's not call a purchase an investment unless we expect it to result in a measurable financial benefit, either to reduce living expenses or to increase income, or to cause capital to grow in market value.

Driving a fast, showy new automobile is, for some people, the main reason for living. But no matter how marvelous the car, it hardly figures as an investment, largely because the resale value depreciates so fast and so far.

Fixed Price

When looking at investment choices for investment basics, 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 - this can be confusing when looking at investment basics. 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 hi 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.

A life-insurance company, like a savings institution, in­vests practically all of its assets in loans, mostly bonds and mortgages, and an insurance policy is a fixed-price contract, no matter whether it is settled by death or by surrender during the life of the insured person. To this ex­tent, life insurance resembles a loan or a savings deposit. An old-age pension is a kind of potential investment. Most pension plans have no cash value at any time. But some plans provide that no matter what happens, an em­ployee or his beneficiary will receive back at least the portion of the cost that he contributed. In such a plan, an employee's contribution, although perhaps made under com­pulsion, is clearly an investment.

After a worker has actually retired, in compliance with the rules of a pension plan he or his dependents may re­ceive benefits quite similar to the sort he might obtain by using his personally accumulated capital to buy life an­nuities from a life-insurance company, with benefits payable as long as the annuitants live. An annuity is a peculiar sort of investment, in that when benefit payments to an annuitant or beneficiary are completed, the capital put into the annuity is used up. The amount of a pension or annuity benefit is nearly always "fixed dollar."

Equities

When looking at investment basics, remember that investing in an equity is essentially different from making a loan.

Real estate, especially a house occupied by the owner, is by far the most widely owned form of equity invest­ment. Buying a home deserves to be classed as a financial investment to the extent that it meets these tests: First, the average expense of maintaining the house, not including amortizing the mortgage, will be less than the family other­wise would pay for rent, so that the use of savings to pay for the house results in lower living expenses. Second, the price paid for the house is no higher than other people would be willing to pay for it, so that, if necessary, the house can probably be sold for about the same amount that it cost.

Of course, a family may decide that the chance to buy their dream house is too wonderful to pass up, and to heck with the extra cost! But by making the tests just suggested they avoid kidding themselves into believing that the house is strictly an investment, when actually part of the purchase cost is an expense.

Besides home owning, an investment in real estate can be a farm operated by the owner, or land or buildings rented out for someone else to use as a home or for business. Or land may be owned mainly in the hope that its market value will rise. When a real-estate owner sells, the price he receives may be more or less than his cost. This is a risk that is inherent in owning an equity.

Where one man is sole owner of an equity, all the profits or the losses are his; or if he owns only part of the equity, then he and the other owners share in the profits or the losses. Whether he is sole or part owner, he has no guarantee as to how much, if any, income he will receive, or at what price he can sell out.

In a small business enterprise, an equity owner is usually not merely an investor; he is also a manager, putting in considerable time and whatever skill he possesses. Several million such enterprises are operating in the United States.

A medium-sized or a large American business organiza­tion is pretty likely to be a corporation, with its equity divided into shares of stock. One man or a small group may own enough of a company's shares to be sure of controlling its management, but in tens of thousands of corporations in the United States, at least some shares are sold through the stock markets to anyone who will buy, and such stockholders usually have no connection with the company's management.

All corporations issue common stock, a purely "equity" type of ownership. Some have one or more additional classes, usually called "preferred stock"; these are equities with some fixed-price features. When a corporation makes a profit, its management decides how much is to be passed on as dividends to shareholders. The dollar outcome of owning common stock, including both dividends and change in price per share, is not guaranteed, not even approxi­mately, and the results may be good or bad. Intelligent owning of common stock requires more study than lend­ing does.

In addition to the types mentioned here, investments take almost any form that the mind of man can dream up.

The nature of some types of investment enables them to be distributed in uniform units, so that anywhere in the United States, and perhaps in other countries also, an investor can readily obtain information about these units, and can buy and sell or redeem them at a price set nationally. Be­cause a standard unit and a nation-wide market simplify the study of an investment, this book puts its emphasis main­ly on such types.

"Security," a Tricky Word

In investment basics, the word "security" is commonly used to cover many kinds of investments. A bond or a stock certificate, or other printed or written evidence of ownership of either a loan or an equity, is called a security, and firms engaged in the business of selling these documents are called security dealers.

Some securities are so worthless that according to an old joke, the owner uses them for wallpaper. So it appears that using the word "security"' when we mean merely a financial document is a first-class way to confuse an amateur investor. Such use is avoided in this book.