How does a person gain from an investment?

By Chad Langager AAA
A:

There are two main ways in which a person gains from an investment. The first is by capital gains, the difference between the purchase price and the sale price of an investment. The second is investment income, the money paid to the holder of the investment by the issuer of the investment. Depending on the type of investment, the source or mix of the total gain will differ. And in some cases, these different sources are taxed at different rates, so it is important to be aware of each.

All stocks can generate a capital gain as the price of a stock is constantly changing in the market. This allows you to potentially sell for a higher price than what you bought the stock for originally. Some stocks also generate income gain through the payment of dividends paid out by a company from its earnings. For example, say that you bought a stock for $10 and the company pays off an annual dividend of $.50, and after two years of holding the stock you sell it for $15. Your capital gain is 50% ($5/$10) and your income gain is 10% ($1/$10) for a total gain of 60% ($6/$10).

Bonds are typically known for their payment of coupons, which is an income source of gain. However, a person also can generate a capital gain from a bond by selling the bond before maturity into the secondary market. For example, if you bought a bond for $1,000 and sold it for $1,100, you would realize a capital gain along with any income gain from coupons paid out to you. There is an inverse relationship between bonds and interest rates, the price of a bond will change in the opposite direction of the prevailing interest rates in the market. If interest rates fall your bond will become come more attractive in the market and be bid upwards.

For more information on gains, see our Investing 101 tutorial.

RELATED FAQS

  1. I want to invest my emergency fund to earn interest. What is a relatively safe and ...

    When considering where to put your emergency money, a key consideration is making sure you'll be able to access the money ...
  2. How does the money from the interest on my bond get to me?

    When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ...
  3. The security which offers the best protection against purchasing power risk or inflation ...

    a. fixed annuityb. common stockc. treasury bondd. certificate of deposit Answers: bDebt securities and investments that promise ...
  4. How are bonds rated?

    Moody's, Standard and Poor's, Fitch Rating and Dominion Bond Rating Service are some of the internationally well-known bond ...
RELATED TERMS
  1. Impact investing

  2. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...
  3. Direct Bidder

    An entity that purchases Treasury securities at auction for a ...
  4. Indirect Bidder

    An entity that purchases Treasury securities at auction through ...
  5. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  6. Super Sinker

    A bond with long-term coupons but a potentially short maturity. ...
comments powered by Disqus
Related Articles
  1. As Boomers Slow Down, Will The Economy ...
    Investing News

    As Boomers Slow Down, Will The Economy ...

  2. Invest In Emerging Market Bonds With ...
    Bonds & Fixed Income

    Invest In Emerging Market Bonds With ...

  3. Mortgage Rates To Rise, But When And ...
    Investing Basics

    Mortgage Rates To Rise, But When And ...

  4. Why Schlumberger Is A Name You Should ...
    Stock Analysis

    Why Schlumberger Is A Name You Should ...

  5. How Visa Counts On Your Free-Spending ...
    Stock Analysis

    How Visa Counts On Your Free-Spending ...

Trading Center