Question

What is the difference between investors and creditors and what is each of their expected returns?

Answer 1

An investor invests money in a business, with the expectation that they will make a profit on the investment. A creditor loans money to a business or person, with the expectation that they will get their money back, plus interest, if interest was part of the loan agreement. A shareholder either purchases or is given shares in a business, making him a partial owner of the business. The value of the shares he owns will go up if the company does well, or go down if the company does poorly. He may also trade, sell, or give away his shares.

An investor earns investment income or dividend, while a creditor earns interest income and other credit charges.

An investor invests money to an investee in order to make profit through profit sharing (investment income or dividend), while a creditor lends money to a debtor in order to make profit through interest income and other credit fees on the loan.

An investor faces higher risk but may earn higher reward (investment income or dividend), while a creditor faces lower risk but earns fixed or limited reward (interest income).