1.1.2 35–45 minutes · Read, practise, review
What you will learn
- Distinguish spending, saving and investing by purpose and risk.
- Compare debt and equity claims, returns and losses.
- Identify the main asset classes and the questions needed to compare them.
1.1 · Introduction to Investing
Introduction to Investing
Introduction to Investing · the work you will do
- 1Start with a purpose
- 2Identify the claim
- 3Trace the risks
- 4Explain the choice
Before you begin
Three people buy the same watch. One wears it, one plans to resell it at a profit, and one buys it as a gift. Does the object alone tell you whether the purchase is an investment?
Take an initial view. Try the choices as you work through the explanations, then revisit your first view.
Video coming soon · about 5 minutes
What can you invest in?
Use the narration below while the recording is being made, then try the decisions in this lesson.
Read the full narration
Welcome to On Judgement. Three people buy the same watch. One wears it, one plans to resell it at a profit, and one buys it as a gift. Does the object alone tell you whether the purchase is an investment? Take a first view. You can change it when you have considered the evidence.
Spending purchases consumption or use now. Saving sets money aside, often in cash or a bank account. Investing commits money to assets expected to produce a future benefit. These categories can overlap in everyday language. For this course, focus on purpose, rights and risk rather than argue over a label. Cash can be useful for near-term obligations and flexibility. Inflation can reduce what a fixed cash amount buys. Investments may offer income or growth but can lose value. A large hoped-for gain says little about whether an investment fits a particular need.
Debt terms specify obligations. A conventional bond might state a face value, coupon and maturity. Credit risk is the risk that the issuer cannot meet its obligations. Market price can also move as interest rates and investor expectations change. Contractual does not mean guaranteed. Security and seniority are separate features. Secured debt has claims over specified assets under its terms. Unsecured lenders do not have that same security. Different creditors can have different ranking. Ordinary equity generally absorbs losses before creditors, but exact recoveries depend on the capital structure and insolvency arrangements.
A shareholder owns part of a company. Returns can come from dividends and changes in the price of the shares. Companies may retain profits rather than pay them out. Equity value depends on expectations about future business results and the claims ahead of shareholders. For a fully paid ordinary share bought without borrowing or other leverage, the amount lost is normally limited to the amount invested. The share can fall to zero. Short selling, derivatives, guarantees and leveraged structures create different exposures. Do not transfer this limited-loss statement to every product containing the word equity.
Public equities are listed ownership claims. Fixed income includes government and corporate debt. Private equity includes private ownership strategies; venture capital focuses on young businesses with significant uncertainty. Private credit involves negotiated lending. Real estate provides exposure to property income and value. Infrastructure includes assets such as transport and utilities, with contract, construction and demand risks. Commodities include raw materials; investment exposure can differ markedly between physical ownership, producers and derivatives. Hedge funds describe varied strategies and structures rather than one economic exposure. Money-market instruments generally have short maturities, but still differ in credit, liquidity and structure. A fund can hold one asset class or several.
A fictional business may start with founders' equity, raise venture funding, borrow when revenues become more predictable, or issue shares publicly. These are possibilities rather than a compulsory lifecycle. A business can remain private, never use venture capital, repay debt early or fail. Financing choices affect control, obligations and who bears losses.
Let's work through A debt claim and an equity claim. A fictional company raises £100,000 through a one-year loan at 6% simple interest. Separately, an investor buys 10% of its equity. What is promised to each? Pause here and try the calculation or reasoning before continuing.
Debt interest, if paid under the terms: £100,000 × 6% = £6,000. Debt repayment due after one year: £106,000 including principal and interest. The 10% shareholder has no automatic right to 10% interest or a fixed dividend. Ownership rights depend on the shares and company decisions.
The lender has a contractual claim subject to default risk. The shareholder participates in residual outcomes. Owning 10% does not imply receiving 10% of revenue or the right to withdraw 10% of company cash.
Now try the choices in this lesson. If your answer changes, identify the reason. Identify the main asset classes and the questions needed to compare them. Use the case activities to put the idea into your own words, and return to the evidence when more than one conclusion is defensible.
Spending, saving and investing
Spending purchases consumption or use now. Saving sets money aside, often in cash or a bank account. Investing commits money to assets expected to produce a future benefit. These categories can overlap in everyday language. For this course, focus on purpose, rights and risk rather than argue over a label.
Cash can be useful for near-term obligations and flexibility. Inflation can reduce what a fixed cash amount buys. Investments may offer income or growth but can lose value. A large hoped-for gain says little about whether an investment fits a particular need.
Debt: a contractual claim
Debt terms specify obligations. A conventional bond might state a face value, coupon and maturity. Credit risk is the risk that the issuer cannot meet its obligations. Market price can also move as interest rates and investor expectations change. Contractual does not mean guaranteed.
Security and seniority are separate features. Secured debt has claims over specified assets under its terms. Unsecured lenders do not have that same security. Different creditors can have different ranking. Ordinary equity generally absorbs losses before creditors, but exact recoveries depend on the capital structure and insolvency arrangements.
Equity: an ownership claim
A shareholder owns part of a company. Returns can come from dividends and changes in the price of the shares. Companies may retain profits rather than pay them out. Equity value depends on expectations about future business results and the claims ahead of shareholders.
For a fully paid ordinary share bought without borrowing or other leverage, the amount lost is normally limited to the amount invested. The share can fall to zero. Short selling, derivatives, guarantees and leveraged structures create different exposures. Do not transfer this limited-loss statement to every product containing the word equity.
The asset-class map
Public equities are listed ownership claims. Fixed income includes government and corporate debt. Private equity includes private ownership strategies; venture capital focuses on young businesses with significant uncertainty. Private credit involves negotiated lending. Real estate provides exposure to property income and value. Infrastructure includes assets such as transport and utilities, with contract, construction and demand risks.
Commodities include raw materials; investment exposure can differ markedly between physical ownership, producers and derivatives. Hedge funds describe varied strategies and structures rather than one economic exposure. Money-market instruments generally have short maturities, but still differ in credit, liquidity and structure. A fund can hold one asset class or several.
A business can use different capital over time
A fictional business may start with founders' equity, raise venture funding, borrow when revenues become more predictable, or issue shares publicly. These are possibilities rather than a compulsory lifecycle. A business can remain private, never use venture capital, repay debt early or fail. Financing choices affect control, obligations and who bears losses.
A debt claim and an equity claim
A fictional company raises £100,000 through a one-year loan at 6% simple interest. Separately, an investor buys 10% of its equity. What is promised to each?
- Debt interest, if paid under the terms: £100,000 × 6% = £6,000.
- Debt repayment due after one year: £106,000 including principal and interest.
- The 10% shareholder has no automatic right to 10% interest or a fixed dividend. Ownership rights depend on the shares and company decisions.
The lender has a contractual claim subject to default risk. The shareholder participates in residual outcomes. Owning 10% does not imply receiving 10% of revenue or the right to withdraw 10% of company cash.
Put it into practice
1. Lending or ownership?
Classify: a new ordinary share; a conventional corporate bond; a venture fund ownership stake; a negotiated business loan; an ETF unit holding shares.
Apply the idea: discuss your reasoning, or add a short note where the task asks for one.
Compare with a model response
Share and venture stake: equity. Bond and business loan: debt. The ETF unit is an interest in a fund whose underlying exposure here is equity. Distinguish the fund wrapper from what it holds.
2. Compare risks fairly
Compare a short-term debt instrument from a creditworthy issuer, a long-term bond from a distressed business, and a diversified share fund. Name two risks for each rather than force a universal ranking.
Apply the idea: discuss your reasoning, or add a short note where the task asks for one.
Compare with a model response
Consider issuer default and inflation for short debt; default, rate sensitivity and liquidity for distressed long debt; market losses, underlying business risk and currency or sector exposure for the share fund. The answer depends on instrument and investor circumstances.
3. A client conversation
A fictional learner says “I need my money in six months and want the highest possible return.” Write the next three questions rather than recommend a product.
Apply the idea: discuss your reasoning, or add a short note where the task asks for one.
Compare with a model response
Ask whether the payment date is fixed, what loss can be absorbed without preventing the goal, and what other cash resources exist. Explore knowledge, costs and liquidity. A short horizon and a high desired return do not by themselves establish capacity for risk.
Jargon buster
Equity
An ownership claim in a business.
Debt
Borrowing with obligations under agreed terms.
Dividend
A distribution to shareholders when declared.
Coupon
Interest specified by a bond’s terms.
Maturity
The date at which repayment becomes due under an instrument’s terms.
Default
Failure to meet a contractual obligation.
Asset class
A grouping of investments with related features.
Leverage
Use of borrowing or other exposure that magnifies gains and losses.
Knowledge check
Choose on the page. Read the feedback, reconsider mistakes and use Try again to reset a question.
What to take forward
Compare claims and underlying exposures. Debt is contractual, equity is ownership, and neither a label nor a wrapper establishes suitability or safety.