Nonequity Investment Instruments

by Steve Lander

An equity investment is a piece of ownership of an asset or company -- such as stocks or your equity in your home, and a nonequity investment is one that doesn't reflect ownership. Nonequity investments are typically debt instruments such as bonds or bank deposits. They are issued by companies, by government agencies and by other entities and typically have the benefit of greater stability.

Why Nonequity

Investments that aren't equities typically have the benefit of stability. When you buy one of these investments, it frequently comes with a set life, a rate of return and an eventual return of your money. If you, for instance, buy a 10-year Treasury bond for $1,000 and get a 2.3 percent rate of return, you can be sure that you'll get $23 per year, every year, until you get $1,023 in the 10th year. Equities fluctuate more, as they're related to the performance of the underlying company or asset. If a company has a good year, it won't pay higher interest on its bonds, but its stock may go up to reflect it. The same applies on the downside as well.

Government Bonds

Shutdown threats notwithstanding, government bonds are some of the safest nonequity investments that you can buy. When you buy a government bond, you're effectively becoming a lender to the government. U.S. Treasury bonds and other instruments, which are usually available in lengths as short as a few days to as long as 30 years, are considered some of most secure ways to invest. You can also buy municipal bonds, which are government bonds issued by state or local governments or agencies that usually pay out interest on a tax-free basis. Another option is to invest in government bonds from other countries, although they expose you to the risks of that country and its currency.

Corporate Bonds

Many companies also issue bonds. When a business needs to borrow money, it can go out to the investment market and attempt to source it from investors through the sale of bonds. Corporate bonds usually work the same way as Treasury bonds in that you buy them, receive interest and eventually get your money back. Corporate bonds are usually rated by third parties to let you know what the credit risk of the underlying company is. High ratings, such as AAA or AA, indicate a stable company with relatively little risk of default; lower ratings -- BB or C+ -- indicate a riskier company. Lower rated "junk" bonds typically offer higher returns to compensate the investor for the risk.

Mortgage Bonds

Another option is to take a stake in the nonequity side of homeownership by buying mortgage bonds. While mortgage bonds can be very complicated, the most basic type is a pass-through bond. These are blocks of mortgages that get assembled together, and a bond represents a share. Every month, the homeowners in the pool make their payments, and the loan's servicer takes those payments of principal and interest and parcels them out between the owners of the bonds. Mortgage bonds provide interest and principal payments over the life of the bond rather than just interest and one lump sum of principal at the end.

Bank Deposits

A bank deposit is another example of a nonequity investment. When you put money in the bank, you're lending that money to your bank. Your bank does what it wants with the money -- usually lending it to someone else -- and returns it to you, usually with interest. It can be a demand deposit account, such as a checking or savings account that gives you access to the money whenever you want, or a certificate of deposit, where it's locked up for a set period in return for a higher interest rate.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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