According to Investopedia, investing is
Note that it says “the expectation of additional income or profit”. It’s far from guaranteed. But just how can you make money from investing?
Getting started with investing can be overwhelming. Part of the reason, as Lanchester points out in How to Speak Money, is the huge amount of jargon involved.
When it comes to investing, there are many ways to make (and to lose!!) money, and even more words to describe them. Trading, subdividing, buying and holding, renovating and flipping, renting, reinvesting. Dividend ladders, rental income, value, capital gains, growth, negative gearing, active, positive cashflow, passive… The list goes on and on.
I have to agree with Lanchester that the reason all of these terms exist is not just because investing is complicated and needs many nuanced technical terms to describe it, but because it suits some people (read: the wealthy and the finance industry) to make finance an impenetrable field of jargon for the average person.
Jargon can be defined as:
“language that is used in a particular context and may not be well understood outside that context. The context is usually a particular occupation (that is, a certain trade, profession, or academic field), but any ingroup can have jargon.”
If you’re not part of the finance “in group”, it can be daunting to get started.
But the basic principles of investing, despite all the jargon that goes along with it, are quite simple. Whether you’re talking about real estate or shares, there are two basic ways to make money: Income and growth.
Investing in property for income and growth
To look at how these work, we’ll start with real estate, since it’s probably the most familiar.
Say you buy a $200,000 apartment as an investment property.
If you can rent it out for $1,250 per month, that’s an income of $15,000 a year.
If, over say 5 years, the property goes up in value and you can sell it for $275,000, that’s a growth of $75,000 (or $15,000 a year).
Investing in shares for income and growth
The same kinds of money-making apply to stocks.
Say you buy $10,000 worth of shares.
If you receive 2 dividend payments of $250 each per year, that’s an income of $500 a year.
If, after say 2 years, the shares have gone up in value and you can sell them for $11,000, that’s a growth of $1,000 (or $250 a year).
The only two words you really need to know.
That enormous list above can really all be summed up in two words: income and growth strategies.
If you trade stocks, you are looking for the price of the shares you purchased to grow before you sell them. But if you buy and hold stocks to collect the dividends, you are seeking an income from them.
If you renovate a house to flip it, you are looking to grow the sale price of the house. But if you renovate a house to rent it out, you are seeking an income from it.
Of course, with long-term strategies, you can often get a combination of the two:
Buying and holding shares, for example, can also be used to gain a capital growth. And you can collect some income along the way in the form of dividends.
Buying and holding real estate can also be used to gain a capital growth. And you can collect some income along the way in the form of rent.
In the next post, we’ll look at what each of these types of investment are good for.
Which are you most interested in? Income? Growth? Let me know why in the comments below!
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Today’s featured image is of some of the money from our travels (paid for by investing!)