Rules of Investment Number Three

Investment basic rule number three is to keep your earned income se­cure by purchasing a security you hope converts your earned income into passive income or portfolio income.

It is time for explanation that go beyond the simple under­standing of assets and liabilities—an understanding that most people never achieve.  But this point all securities are not necessarily assets, as many people think they are.

Many average investors cannot distinguish between a security and an asset. Many people, in­cluding many professionals, do not know the difference. Many people call any security an asset.

A security is something you hope will keep your money secure. And generally, these securities are bound up tight by government regulations. And that is why the organization that watches over much of the world of investing is called the Securities and Exchange Commission, a.k.a. the SEC. You may notice that its title is not the Assets and Exchange Commission neither is it called the Securities and Guarantees Commission. The government knows that all it can do is maintain a tight set of rules and do its best to maintain order by enforcing those rules. It does not guarantee that everyone who acquires a security will make money. That is why securities are not called assets.

The basic definition, an asset is to puts money in your pocket, or the income column; a liability takes money from your pocket, and that shows up in your expense column. It’s simply a matter of basic financial literacy.

So it is up to the investor to know which secu­rities are assets and which securities are liabilities. The confusion begins for most investors when someone tells them that securities are assets. Average investors are ner­vous about investing because they know that just because they buy a security; it does not mean they will make money. The problem with buying a security is that the investor can also lose money.

So, if the security makes money, it puts money into the income column of the financial state­ment, and it is an asset. But if it loses money and that event is recorded in the expense column of the financial statement, then that security is a liability. In fact, the same security can change from being an asset into a liability. For example, I bought a hundred shares of stock in ABC Company in December for which I paid $20 per share. In January, I sold ten shares for $30 per share. Those ten shares of stock were assets because they generated income for me. But in March, I sold ten more shares for only $10, so that same stock had be­come a liability because it generated a loss (expense).

It is up to the investor to determine if each security is an asset or liability. Actually, risks come from the investor who not knowing the difference between an asset and liabil­ity.