Difference Between Loan and Investment

Here, I am providing the detail of difference between Investment and Loan:

1. Investment is one of Basics of Finance . It means, if anybody will ask about the basics of finance, you have to tell investment is one of basics of finance. But loan is source of finance. If we have not money or fixed asset, we can finance it through getting loan from banking and financial institutions.

2. Accounting treatment of investment is different from accounting treatment of loan. Suppose, you have your personal contractual business. You bring your capital in business and after this you have started to earn money through dividend . For this, you have bought 5000 shares of XYZ company.This is your investment in shares and it will go to balance sheet asset side.  But if you have not sufficient money to buy the 5000 shares and you take some money from other party on interest. That payable amount will be your loan and it will be shown as liability in balance sheet. Sometime, you can give loan to other. Basically, it is your investment. But, you can show it in Loan and Advance as Asset.

3. On the basis of difference between investment and loan, board of directors are playing the game in business on equity. You have read in financial management, that it is the  duty of management to get loan at cheap rate, lower risk and control and risk and invest it at higher profit at lower risk. What did you get idea after reading financial statement. I have only one idea. Loan is power of business for taking the challenge to get high yield on same amount invested in any other project.

4. Loan is affected from market interest rates and cost of debt but investment decision is affected large number of factors like capital budgeting , investment analysis , project planning , real option analysis and capital asset pricing model .

5. Area of investment is also more than area of loan. Dealing of loan is just limited to financial institution who do this duty professionally but area of investment include investment in each and every market, like investment in commodity market , investment in real estate, investment incapital market , investment in foreign exchange market , investment in insurance market , investment in private equity.



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