7.2.1 Investment characteristics: return
Return is the profit that an investor makes on an investment. The return can come in two different forms:
- Income—money you receive while you own the investment, such as:
- Interest—money paid to you at a certain percentage for the use of the money you have invested. Like a bank account, investments such as guaranteed investment certificates (GICs) and bonds pay a percentage every year for a period of time. For investments like a GIC, the rate of interest is often set in advance for a certain period, so you know what you are getting.
- Dividends—part of a company's profits that it may pay to each shareholder. This gives shareholders regular income like interest, but because dividends are based on the company's profits, they are often not guaranteed.
- Rent—money you receive for the use of property that you own.
- Increased value—the profit you make when you are able to sell investments for more than you paid for them, called a capital gain. The amount of your profit is hard to predict, because it depends on how easy it is to sell your investment when you want to and what you can get for it at that time. You may face a capital loss if no one will pay you more than your investment cost you.
- Income: Money you receive from work, gifts, business or investments
- Interest: The amount of money you earn when you lend someone your money
- Dividend: A portion of a company's profits paid to shareholders
- Capital gain (loss): Money you make (or lose) when you sell an investment
Some investments receive a return that is based on the return on other investments. For example, some term deposits receive interest that is based in part on whether the average stock market price rises. These investments are called derivatives, since their return is derived from another factor. Before investing, be sure you understand how your investment will earn a return.
Some factors may also reduce the return you receive from the actual earnings that your investment makes:
- You may have to pay fees or commissions and other charges to a broker or investment manager for investing in products like stocks and mutual funds. (See the section on Fees and costs.)
- If you borrow money to invest, the interest you pay on the borrowed money reduces the value of the earnings you make. Borrowing may increase your gains if your investment rises in value, but it also increases your losses if the investment falls in value. Borrowing to invest is often a risky strategy, so it's best to discuss it with a qualified advisor before borrowing.
- You will likely pay income tax on the income your investments earn, but when you pay and how much you pay may depend on the investment. For example, you pay tax on capital gains only when you sell your investment or transfer it to a new owner, and then only half of the income is taxable.
Of course, the return you expect when you buy an investment may not be the actual return you receive. Investments can lose money.
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