RETURN ON INVESTMENT- Excerpts of the book "Finance for dad"

There are three possible ways to get a return from your investments:

a) interest income

b) dividends

c) capital gain

What does interest income mean?

In general, interest income is the payment that comes from using money. It is the way in which an investor makes a profit from fixed income instruments. When you invest in a savings account, a bond or a deposit certificate, you get a profit periodically for lending your money.

What is a dividend?

It is the periodical payment (usually quarterly) that corporations pay to their shareholders. It comes from the result of the company’s management, which puts aside one part of their profits to reinvest and another part to be distributed among shareholders. Dividends are not guaranteed. If the corporation doesn’t make profits, investors won’t receive anything for this concept. Even if the corporation makes profits, they might not be distributed. Indeed, most corporations don’t pay dividends. They use all their profits to develop new projects in order to make their business grow. Therefore, they attempt to compensate their shareholders with significant capital gains. Dividends are generated by corporations as well as by mutual funds and ETF’s.

What does capital gains mean?

The dictionary defines it as “the profit realized from the sale (disposal) of a capital asset, or from holding it during a period when its market value is increasing”. For example, if you bought stock of Microsoft at $26 and now they are at $27, you are getting a one-dollar capital gain per unit. However, keep in mind that this gain changes constantly as prices fluctuate. If this one drops below the purchase price, it may turn into a capital loss.

What does a financial investment portfolio consist of?

An investment portfolio is an outline of all your investments, including cash in sight, short, medium and long term. It will have financial assets of variable and fixed income. Creating a portfolio will require a process called “Asset Allocation” (see appendix B), which will help you define both the securities you should include and their terms. In the file “I” that you downloaded from the Internet you will find the complete process so that you can carry out this exercise, but first you need to get familiar with basic concepts. Let’s refer to the composition of a portfolio. You may find different denominations in various text books: assets, instruments, securities, products, etc. There are different terms to refer to bonds, stock, mutual funds and other assets in the financial market.