Publication 13. 2018

“It’s not how much money you make, but how much money you keep,

how hard it works for you, and how many generations you keep it for.”

Robert Kiyosaki

What are the different ways that I can make money on my investment? How can I make a profit? Are there different ways or is there just one specific way to earn money when I invest? Can I earn interest on stocks? How does it work? Indeed, there are many investment options available and each of these options has their specific ways in which you can make a profit or at times losses.

An investment return is a profit or loss that an investor makes on his or her investment. This return can be positive or negative; it can be pretty high or it can be very low. When a return is negative, it means that you have made a loss on your investment and you will get back less money than you had initially invested. The probability of making a loss in your initial investments drives the riskiness of the investment itself. That is, the higher the chance of experiencing a loss, the higher the risk related to that investment. Of course, the opposite is true, the lower the chance that you will make a loss, the lower the risk of the investment. In finance, the total return that an investor makes can be broken out into two main sources – capital appreciation and capital income. Let us explore each in turn.

Capital appreciation is the growth in the value of your investment because of an increase in the price of the securities that you had invested in. For example, say you have about $10,000 to invest in May 2016, and you opted to purchase stocks, Apple stocks to be exact because you heard that the company will do well in the future. On May 13, 2016, an apple stock is worth $90.52 for each unit of stock. So, on May 13, 2016, you are able to buy 110 units of apple stocks for a total investment of $9,957.20. In order to make this simple, I am assuming that you didn’t pay any fees to buy the stocks, which in reality is not normally the case. On October 5, 2018, the price of each apple stock has increased to $224.29. If you kept your investment until October 5, 2018, your 110 units of the Apple Stock would now be worth $24,671.90. Your investment has increased from $9,957.20 to $24,671.90; this is an increase, or more appropriately, this is a capital appreciation of $14,714.70. These are the actual prices of the Apple stock for the given dates. Not bad in terms of return, don’t you think?

On the other hand, the capital income portion of an investment’s total return represents periodic cash flow that is paid to the investor. These payments provide a stream of income that is paid to the investor either on a monthly, quarterly, semi-annually or annual basis. For example, this can be dividend income in the case of stocks, interest income in the case of bonds and rental income in the case of real estate.

Accordingly, the return an investor earns depends significantly on the type of investment he or she is making, whether they are bonds, equity, real estate, currency or commodities. Join us for the next publication where we will discuss the different return possibilities across the main investment options of bonds, stocks, real estate, and mutual funds.

This editorial is presented to you by the DCSX with the collaboration of Vertex Investments.

Author of this publication: Stephanie Shaw CFA, MBA.

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