Is the Investment Insured or Collateralized? (Part 1)
When making a new investment, most people never stop to think about what can go wrong because they’re so excited about the profits that they will earn. But spending time thinking about this (not in fear, but simply thinking through all the possibilities) is exactly the thing that can keep you from being in a situation where your investments go horribly wrong.
So is your investment insured?
This question is teaching you to look for something in place that will ensure your success beyond simply hoping that your investment goes well. It might be actual insurance where a company has placed reserves and given a guarantee that your performance will meet a certain standard.
More often than not, it will not be actual insurance, but some form of collateral that you look for. Of course, most investment opportunities don’t offer this, but many can and do. Others might not look to automatically offer it to you, but if you seek this extra layer of protection, the person you are dealing with might be willing to offer this safeguard if he needs you (and your capital) as a part of his team.
Let’s say, for example, that you are considering making an investment with a potential business partner who wants to open a retail operation. On one hand, you both believe that it’s a great idea and will be a great success. On the other, you know that retail operations are incredibly risky and that many never work out. What should you do? Well, if your potential partner is sure of his plan and he has another asset that he is willing to use as collateral (let’s say a piece of real estate with more equity in it than you are looking to invest/lend to him or cash value in a life insurance policy above this amount) then you could be more willing to invest/lend with/to him for this operation. You would want to make sure that there was sufficient extra equity in your collateral that if you collected, the whole operation would be worth your while.
Next, we’ll look at a more concrete example of this type and also look at an example to think about when investing in the stock market.
This is Part 11 in the series Investment Due Diligence. To continue with this series, click on Pt 12. To use this as a growth tool to better understand your own calling, you might start by reading Part 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9 and Pt 10.
Photo credit: Ingolfur B.