We’ve all heard of stocks — usually the ones that skyrocket. Bonds are often ignored. When was the last time you sat around having a beer with friends and talking about your latest bond purchase?
When it comes to investments, bonds often get a bad rap since they’re commonly marketed to people nearing retirement. But that doesn’t mean they’re boring or only for older investors.
What’s the Difference Between Stocks and Bonds?
It’s the difference between buying a share of a company and lending that company some money. Both company stocks and bonds give you a vested interest in the future of a company, whether you own part of the business or loan money to it.
Stocks: A share of stock entitles you to a percentage of ownership in a company. The percentage you own is based on the total number of shares outstanding. If there are 10,000 shares outstanding and you own 100 shares, then you own 1% (100/10,000) of the company. (Don’t think that entitles you to walk in to corporate headquarters and start telling 1% of the people how to do things!)
Over the past century, stocks have yielded returns of approximately 10%, although these returns can be highly variable depending on what time period you look at.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
— Robert G. Allen, Investment Advisor and Bestselling Author
Bonds: Though bonds earn interest — like savings accounts — the potential return can be much higher. A corporate bond is a loan made to a company. When you own bonds, you own a share of a loan made to the company — and in return, you receive regular payments of interest on the loan. Historically, bonds have returned 5% to 6%.
Differences between stocks and bonds: The main difference is that a share of stock makes you a partial owner of a company, while a bond makes you a partial creditor. Stocks may make dividend payments, but those are subject to the discretion of a board of directors. Bonds are set up to pay regular interest payments — and in some cases, as you’ll see below, they also make regular principal payments.
How Can You Get Started Investing in Private Companies?
One of the most common ways to invest in the private market is through private equity. Private equity firms cater to individuals with high income or high net worth. (If you can afford not to work, this option may be for you.)
These firms allow you to invest directly in businesses that aren’t traded on stock exchanges. Though some firms focus on investing in established businesses, others focus on startups and small businesses. Private equity firms get access to small businesses by providing much-needed capital in exchange for (usually large) equity stakes.
Because they’re often sitting on piles of cash (don’t we all wish we had this problem?), private equity firms and individual investors are able to make large gambles on the success of startup companies. They generally have outstanding investments in a number of companies at any given time and hope for a large payout if the company goes public. One might compare it to sitting on a bunch of lottery tickets with (hopefully) better-than-average odds.
Though carefully researched by the firms, these investments are still gambles based on the large number of startups that ultimately fail. Investors roll the dice and only need to be right a handful of times to be profitable. For many of us — people with bills — this level of risk isn’t an option.
Additionally, if you’re not rolling in the Benjamins, the high net worth and high-income requirements are a barrier to access to private equity funds for most investors.
Small Business Bonds™
If you want to lend local businesses money without having to use mob-style tactics to recoup your investments, new platforms for small business debt investments have recently cropped up. These offer debt investments, set up as revenue sharing notes, promissory notes, or Small Business Bonds™. Though they’re a relatively new investment asset class, they’re quickly gaining traction.
Much like publicly traded bonds, Small Business Bonds™ are loans issued by small businesses in which investors can fund a small portion of the loan to support the local stores they know and love. And you don’t have to be sitting on piles of cash to invest; some marketplaces allow for just $10 as a minimum investment.
Although they may not have the same potential returns as private equity investments, some investors may appreciate the expected fixed returns, set up to pay back principal and interest monthly and allow for easy compounding.
Small Business Bonds™ can offer up to 10% annual returns on investment* — generally larger returns than FDIC bonds — without the volatility of private equity investments. They also offer investors a new way to invest in local economies.
“If you don’t find a way to make money while you sleep, you will work until you die.”
— Warren Buffet, Investor
How Can Investors Access Small Business Bonds™?
Though you could spend your time cold-calling local shops and asking if they need a loan (warning: they’ll probably just hang up on you), there are more efficient methods of finding Small Business Bonds™.
Investors can gain access to them through marketplaces such as SMBX. Unlike many other bonds, SMBX Bonds are set up to pay regular monthly interest and principal payments.
SMBX reviews the businesses issuing Bonds prior to their issuances, provides investors with a prospectus with information to evaluate their prospective investment, collects principal + interest payments from the companies, and distributes earnings to investors. Investments made through SMBX can grow over time as you reinvest your earnings.
*All estimated returns on principal + interests are not guaranteed. The statement is based on the following assumptions: 1) an offering successfully closes and an investor is allocated a Bond or Bonds, 2) that the investor holds their Bonds to maturity and 3) that there are no defaults made by the issuer on any of the Bond payments from issuance to maturity.