There are a few different ways that investing can actually earn you some money, including price rises, dividends, and interest payments. We profile each of these concepts below.
When thinking of investing, most people will probably just think of rocketing stock prices as the way that money is made. In fact, there are a variety of ways that a savvy investor can aim to grow his wealth over the long-term, and each method is an important tool to achieve future goals.
The most popularly known way of making money with investments is when the price of your share rises and it gains additional value. With the price rising and increasing demand for your share, you could sell the stock and earn a profit on your initial investment.
This doesn’t only apply to stocks – the value of a bond, ETF, or another investment could also rise. It all depends on how many people want a piece of the pie.
The most obvious examples of share price growth that have driven returns for shareholders include the largest tech companies of the day, such as Amazon, Google, or Apple.
Once you own a share, you will be entitled to any dividend payments that a company chooses to distribute.
A dividend is your cut of the earnings that the company has made – as you are a part owner of the company, you are entitled to receive some of the profits.
Not every company pays a dividend – some notoriously so. Many tech companies have seen such high share price rises, meaning financial gain for investors, that they haven’t really needed to pay a dividend as investors have made money anyway.
A smart move is to reinvest your dividends back into the business. Each time you do so, you’ll end up with more shares, which will lead to even more dividends, and the cycle will virtuously continue.
This form of payment is more associated with fixed-income securities such as bonds. When companies or governments issue bonds, they basically issue debt. This means that they are borrowing your money.
In return for your money, the bondholder will receive periodic interest payments and the full amount of the bond on maturity (i.e. the end of the bond).
Bonus: stock buybacks
A company will sometimes engage in stock buybacks, meaning that the company will buy its own stock from the market. The most common reason for this is to increase their own share price – giving another way in which companies can drive financial gain for their shareholders.
“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time.”
- Warren Buffett, Billionaire Investor