How do investments earn you money

One way investments generate income is through dividends. If you have invested in a company by buying shares, for example, that company may pay you a small proportion of its earnings to its shareholders in return. Such a payment is called a dividend. In addition, shares from a publicly-traded company will likely rise in value in line with the positive performance of the company. How to earn dividends from individual stocks If you want to earn dividends from individual company stocks in your portfolio, there are several things you need to consider before you buy shares. If you only buy shares in a small number of companies, this strategy may not offer enough diversification. By not spreading your investments over different assets, you may be increasing your risk - similar to putting “all your eggs in one basket”. Furthermore, if you are investing your money in stocks of just a few companies, you also need to take the time on a daily basis to closely monitor the companies that you have invested in. For instance, if you are investing in a company that produces goods that depend on resources from other markets, such as steel, you should also be keeping an eye on how global steel prices are developing, for example. Also, there are broker fees and conditions as well as taxation issues to consider that may be more complex when dealing with individual shares. Finally, you’ll want to educate yourself on the taxation of your assets which depends on taxation laws in the country where you live. It’s a good idea to inform yourself before you invest and to consult your tax advisor when needed. How to earn dividends from distributing ETFs Investing in funds such as an exchange-traded fund (ETF), which is made up of multiple stocks or assets, may significantly reduce investment risk compared to investing in individual stocks thanks to diversification. Diversification means that you spread your investments - and thus the risk - across a range of different asset types. Investors can choose between “distributing ETFs”, which regularly distribute dividends, and “accumulating ETFs”, which reinvest dividends. So if you are looking for your assets to generate regular income, then you should look into investing in distributing ETFs that regularly pay out dividend income. How to earn money from compounding Compound interest is the money investors earn on the interest generated by their investments. Compounding means that the interest generated by an asset will generate further income over the course of time if reinvested continually. The rule of 72 One way to calculate how long it will take you to double your investment with compounding is by applying the “rule of 72”. Let’s say the fixed annual interest for an investment is 3%. You divide 72 by 3 and the result is 24, meaning that it will take 24 years to double the capital you invested if you leave your returns to compound. This calculation shows you how low interest rates - along with the threat of inflation - may adversely affect your funds, like what you keep in a savings account. When interest rates are low, your investment will only generate very little income at a very slow pace.