Using money to make money is a corner stone of our world economy.   Today’s post is a high level look at ways you can use your money to make money.

 

Basic Options

You can either use your money to:

•  create a business that generates revenues (entrepreneurship) by using your own money and or money from others (leverage).
• you can give your money to others  either to use and return or to purchase ownership of an asset or business.

Basic types of investing

• equity
• fixed income
• investment capital (purchase ownership)

Ways to make money investing

Basically for the privilege of using your money you expect a return on your investment.  This comes in the form of either interest, dividends or capital gains or your return on a particular investment can be a combination of all three.

The main variables to consider are:

• term of the investment – length of time the investment is committed for and whether it is redeemable or not redeemable until maturity
• risk – likelihood the investment will be returned (on demand or on maturity or when sold).
• fixed or variable returns –  structure of the investment compensation can be set and guaranteed or linked to market indexes, can change the performance of the object of the investment (value of the purchase) and with specific defined events.
• tax – in Canada interest, dividends and capital gains are  taxed  at different rates.

Interest

This is a fixed payment, usually a percentage of the money you invested.  It can be paid in any frequency from daily to multi-year intervals.   The amount of the interest paid depends on the type of investment.  Interest based investments are often called fixed income investments and are usually of a lower risk but this can vary.  This income has the worst tax treatment,  taxed at the same rate as you employment income

Dividends

This is a fixed payment from a company in which you have made an equity investment (that is giving them your money made you a part owner of the company through shares – the more shares you buy the more ownership you get.)  Dividends can also be paid on varying frequencies.  The risk is related to the company operations – if it thrives and makes lot of money the dividend stream continues and if not, well it could stop.  Dividends are taxed a preferred rate which usually works out to lower than your marginal tax rate for employment and interest income.

Capital Gains

Capital gain is simply when you sell your ownership in the investment and get more money than you paid for it (Capital loss is the opposite).  The frequency is obviously based on the buy sell cycle.  You could invest in a business and hold the investment for ten years and than sell it for a profit (which is a capital gain) or you could buy it and sell it in 3 days for a profit.

Risk is obviously related to the ability of what you purchased to  increase it’s value over time.  Some things are low risk to increase in value and others are not.  To determine the potential for capital gain within an investment requires careful and diligent analysis.

Half your capital gain is tax exempt, so in essence 50% of the gain is not taxed. (Their are exceptions to this and different rules for corporate capital gains)