The 2 Ways Investors Make Money
Sep 07, 2024Read time - 3 minutes / Disclaimer
Today let's review the 2 ways investors make money.
Understanding how investors make money gives you:
• Clarity.
• Confidence.
• Motivation to invest.
Unfortunately, most people weren't taught how investors make money.
Investing Is Complicated
Investing is often viewed as:
• Difficult.
• Complex.
• Confusing.
Making sense of how to make money with investments is important.
Especially if you have a goal of building a large net worth.
Fortunately, stories help simplify this topic.
Here are the 2 ways investors make money:
1. Capital Gains
Money is made from buying and selling an investment.
Here are a few examples.
Example:
David loves ABC company.
He's bought many of their products.
He enjoys the company and its products so much, he decides to buy stock.
David buys $5,000 in ABC company stock.
A few years later, he decides to buy a house.
His stock is now worth $7,500.
He decides to sell it and put the money towards a house.
To review:
• He bought $5,000 in stock.
• The stock price went up.
• He sold it for $7,500.
• He made a $2,500 profit.
The $2,500 profit David made is called a "Capital Gain".
Another Example:
David finds a house he likes for $400,000.
He applies for a loan and makes an offer on it.
The seller accepts his offer.
A month later he moves into the new house.
Several years pass and David applies for a new job across the country.
He gets the job and decides to sell his house.
He lists it for sale with a real estate agent.
A few weeks later he receives an offer from an interested buyer.
The house sells for $500,000.
To review:
• He paid $400,000 for it.
• The house price went up.
• He sold it for $500,000.
• He made a $100,000 profit.
The $100,000 profit David made is called a "Capital Gain".
2. Income from an Investment
Money is made from holding an investment that provides income.
Here are a few examples.
Example:
Heather loves XYZ company.
She owns all of their products.
She enjoys the company and its products so much, she decides to buy stock.
Several months pass after her purchase.
She notices something different on her investment statements.
Every 3 months there is a deposit into her account.
The deposit is around $100.
She wonders why and calls customer service.
They tell her the deposited money is from her XYZ company stock.
To review:
Some companies pay investors money each quarter for owning their stock.
The amount paid varies.
It depends on:
• Amount of money invested.
• What the company pays out.
The money Heather receives is "income from an investment" (also called dividend income).
Another Example:
Heather decides to buy a rental property.
She finds one she likes, applies for a loan, and makes an offer.
The seller accepts her offer.
The property needs some work and it takes her a month to fix it up.
After the updates are complete, she starts looking for a renter.
She finds a nice couple.
They agree to rent her property for $2,000 a month.
The $2,000 a month is "income from an investment" (also called rental income).
Taxes
Taxes on "capital gains" and "income from an investment" are different.
"Capital gains" tax is based on how long you own the investment.
"Income from an investment" is usually taxed just like income from a job.
Conclusion
You may be wondering.
Which is better "capital gains" or "income from an investment"?
It's a matter of personal preference.
One person may prefer capital gains.
Another may prefer income.
Both are great ways to build wealth.
That's all for today.
See you next week.
