Earning income

You're in this to make money. So how does this happen? There are two ways you make money in investing. Firstly, you earn income when your investment returns you money. Secondly, you make a capital gain (or profit) when the value of your asset goes up.
Income is what you earn - capital gain is your profit

What types of income are there?
Income means the regular payments you receive from an investment. Your income may be:
  • interest from cash or bonds
  • rent received from properties
  • dividends on shares
  • distributions if you invest in managed funds
  • realised capital gains (see below)
  
Dividends versus distributions
Dividends are payments to shareholders of a portion of a company's earnings. This is usually decided by the board of directors. The term dividend applies if you invest directly in shares.
If you invest in a managed fund, the same thing applies, but it is called a distribution.

Will I have to pay tax?
Different investments attract different tax treatments. Some investments may even attract tax benefits. Consider tax when deciding on your investment strategy.

Check out investing and tax.
Man standing on a boardwalk
Income versus capital gains
The difference between income and capital gain can be confusing. This analogy may help. Imagine you invest in a house and rent it out. The rent gives you a regular income. Over the years, the value of your house may go up. This is your capital gain (or profit). You won't realise your capital gain until you sell the house. It's the same with shares and managed funds. Read more about capital gains.
Consider reinvesting your income
You can usually choose to reinvest your dividends (from shares) or distributions (from managed funds). The advantage of reinvesting is that you usually do not have to pay any extra fees, and the amounts you reinvest benefit from compound interest. It can make a huge difference to your overall return over the long term and may attract tax benefits.

Check out the power of compound interest in building wealth.
Find out more about investment
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