I would like to draw some commonalities between the considerations that one makes when he lends money and when he invests. As the former is something most people have encountered and are familiar, I hope you would be able to draw the relations and aid you in making better investing decisions.
So what do you go through in your mind when you lend money to others?
The first question you will ask yourself is that do you trust the borrower to pay you back as promised? Let us assume that you charge an interest to the borrower. How sure are you that you will get both your capital and interest back? I believe here are some of the factors you will consider:
Understanding the background
Would you lend money to a someone you do not even know? Would you invest in a company without a good understanding? I believe the former you wouldn’t but people do commit the latter as they listen to their friends and relatives that the company stock is worth buying. If your friends and relatives recommend borrowers to you who pays you interest, will you lend money to them? I believe you will want to find out more. So find out more about the company before you invest! Read more…