What Is Investment Income?

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What Is Investment Income?

One of the most important things for any smart investor out there is to understand the meaning of investment income. After all, most of us invest our money in order to make a more significant profit at the other end, right?

In the investing world, there are thousands of different investment opportunities available to us, but with so many, how exactly do we choose which ones are the best option to invest in?

The only way we can answer this is if we completely understand investment income. The main reason we invest is to make a profit, and so the key to finding which investment option is most suited lies in identifying which investment opportunity provides the biggest chance of income.

To make things easier, we thought it would be useful to create a guide on what is investment income, to give you a better idea of where to make the best investment possible.

Types of Investment Income

As you probably already know, the investment world offers a wide variety of investment choices, all providing different amounts of income. The nature of the revenue might vary. Usually, investment income tends to be in the form of things like capital gains, dividends, rent, interest, or a combination of all these things.

Because the nature of the income is variable, this means they might be taxed differently. An example could be that income from long term bonds might be taxed at low rates, while revenue from other bonds might be completely tax-free. The tax rate that is implied on investment is, therefore, an essential factor to consider when getting into a new venture, as the net income you will gain from it will be an income after the tax.

We will now take a look at different types of investment income.

Capital gains

A lot of investments typically involve the purchase of an asset. This could be an investment in the shares of a company, which consists of purchasing a certain amount of shares from the firm. If you were to invest in real estate, for example, you would be involved in buying property. When you eventually sell the asset, the net income that will be received is known as a capital gain. The net income is, therefore, the difference between the price you sold the asset and the cost you purchased it for.

Dividend

Along with capital gains, investment in the shares of a company can also yield some amount of dividends along with it. When you purchase shares of a company, you are literally buying a part of the company. A very profitable company might regularly decide to distribute some of its profits among its owners, meaning the shareholders. That share which is received by a shareholder is known as the dividend income.

There are many companies which regularly issue dividends to their shareholders, and which can often be paid on an anual basis. When investing in such companies, it is also a possibility to include any likely dividend received along with potential capital gains when calculating an expected income from the whole investment.

Rent

When it comes to the real estate industry, investments can generate rental income. If you have purchased an apartment, for example, you may choose to rent it out and benefit from the capital gains only after you sell it.

In the meantime, you could perhaps rent the apartment out to a tenant, who will pay you on a fixed monthly basis.

Interest

Another type of investment income is interest. Typically, when you borrow money from a bank or another financial firm, they will often add on some interest on top for borrowing. This interest is then paid back to them on top of the original money you borrow.

If you switch the cards, however, and deposit money into a new bank account, you are technically lending money to the bank. Therefore, the bank will pay interest to you for the period that you keep the money within the bank. The more you deposit, and longer you leave it, the more interest you are likely to receive in return.

Another good example is when you purchase a bond, and you lend money to the bond’s issuer. This money is loaned at a fixed rate of interest and usually for a specific amount of time. The issuer should, therefore, pay some interest to you for the period of lending your money, and finally, when the bond matures, the issuer will return the money you originally borrowed.

 Types of Investments and Nature of Income

We will now take a look at some of the most popular kinds of investments and types of income they usually offer.

Equity

The equity market is known to be a popular investment avenue. Shares from companies can provide a good amount of capital gains, as well as dividend income.

Bonds

If you decide to invest in a bond, this can yield interest and capital gains over the years. Whoever issues the bond should pay interest on any amounts lent to them. Furthermore, bonds can be sold even before they mature in certain markets, meaning they can also lead to capital gains.

Real Estate

Investing in real estate can provide significant capital. This includes rental income, or capital gain when reselling. This is also a favorite passive income generator, as a fixed amount of rent can be received every month.

Deposits

By choosing to invest in bank accounts or corporate deposits, you are technically lending money to the bank or corporate firm. This, therefore, leads to good interest income.

Final Verdict

So there you have it! We hope that this article has helped to answer the question, “what is investment income”, and now you should have a good idea of the various ways you can invest. If you are making an investment decision, we advise you to look at all the available options and consider which ones will really make you a higher profit in the future. Good luck investing!

Author
C. James

C. James is the managing editor at Wealth Gang. He has a degree in finance and a passion for creating passive income streams and wealth management.

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