Investments offer Different Ways to Make Money
Investors often forget that there are different ways to make money in investments. Broadly speaking, investments can have a capital appreciation component as well as an income element. Here’s where investors can short change themselves (pun intended) in their thinking.
In periods of market volatility, investors commonly focus on daily price changes of stocks, mutual funds or even the S&P 500 when values fluctuate every day that markets are open. Capital appreciation or a capital loss doesn’t happen though, until you sell. You haven’t really “made” money or “lost” money until you sell, because the capital appreciation or capital loss is based upon the price you bought versus the price you sold.
Many stocks and mutual funds pay out dividends, which is a way for companies to share their profits with shareholders. Dividends are the “income” element, and since they are an accumulated portion of profits, are often paid quarterly, or on another schedule determined by their boards of directors. Therefore, dividends are not reflected daily and are often forgotten when investors hyper focus on daily market fluctuations. Dividends can often be taken as cash or reinvested into more shares.
In similar fashion, bonds pay out an income component called a yield. Sometimes the yield is synonymously referred to as a coupon payment, because in the old days when bonds were issued by paper, there were paper coupons that the bond holder would take to the bank to receive their scheduled income payment. The face value of bonds can also fluctuate similar to how the price of a stock can go up and down.
There are some investments like gold and other precious metals that do not pay an income component at all. Therefore, there is only one way to make or lose money in non-income producing investments, and that is solely by capital appreciation or capital loss (price you buy versus price you sell).
Remember that among different investments, there are different ways to potentially make money.
