Investment Fundamentals

There are two fundamental considerations entering into the making of an investment: the security of principal, and the security of income. The security of the principal implies the certainty of the sum of money surrendered being returned or recovered. Such sum of money is termed the "principal" of the investment. In addition to this expected return of the principal, an investor generally demands additional payments, usually in the form of a fixed periodical income, known as "interest," "income," or "yield." The surrendering of property to the use of another without the increment of income is not an investment, but a gratuity, or, as it might be termed, an "accommodation loan." Accordingly, nothing constitutes investment which does not imply the recovery of both the principal sum and also an additional amount or amounts representing income or profit.

Keeping these principles constantly in mind will greatly assist students and investors in the study and analysis of the various forms of investments.

To secure the return of the principal it is not essential that the borrower or debtor should agree to repay the loan at any particular time. In other words, it is not necessary for a debt to have a maturity date. Thus, most French government bonds are perpetual, since there is no agreement to redeem them at any time. The return of the principal in an investment of this kind is obtained, however, through the negotiability or marketability of the security, i.e., an investor is enabled to dispose of his commitments through sale and receive back the principal sum surrendered. He need not, therefore, be concerned with the due date of bonds or other types of investments he may hold. As long as the investor can transfer for value the evidence of ownership or indebtedness he holds, there may be ample security of principal.