Submitted by nsscadmin on
Investments make money in multiple ways, including:
1. By paying out income
2. Capital Gains
Let’s start with paying out income, which is done through interest or dividends. The payment depends on the type of investment you have purchased.
Interest is paid to investors who invest in debt instruments, such as bonds. The interest payments compensate the investor for loaning the company money. This can be paid to the investor at regular intervals or when the bond matures along with the principal investment. The interest rate is usually preset and determined before the investment is made.
Dividends are paid to investors who buy equities. They are a portion of the company’s profit which are passed on to the shareholders. They are paid at set times throughout the year. A company does not have to pay dividends to investors and they can go up or down dependent on the company’s profits.
We already explained capital gains in a previous blog post, but here’s another brief description. Capital gains are made when you sell an investment for more than you paid for it. It is the price appreciation of an investment since it was purchased. However, investments have risks and there is no guarantee that an investment will increase in value and result in any capital gains.
Here’s an example of capital gains for an investor who has purchased equities in a company. Their initial purchase was 100 shares in the company with each share valued at $5. The total value of their shares is $500. Two years later the share value has risen to $15 per share. The total value of their shares now is $1500. If they were to sell all their shares, their capitals gains would be $1,000. This is where the odd adage “buy low, sell high” comes from.