When an investment is made, the motive behind the operation is to make money, in whatever form it comes. Money made from an investment can come in different forms such as either capital gains or investment income.
Here is an illustration of what both terms mean:
Capital gains can be defined as the profit realized when the value of an investment increases.
For example, if you bought the 1000 shares of Guinness Nigeria Plc in year 2015 at N10 per share. It means you have incurred a total expenditure or cost of N10 x 1000 shares = N10,000.
Assuming the share price of Guinness rises to N20 per share in year 2016, and you decide to sell at market value, your total income at this point will now be N20 x 1000 shares = N20,000.
Therefore, the capital gain on your Guinness shares will be N20,000 – N10,000 = N10,000.
Investment income, on the other hand, refers to things such as interest received, or dividend paid on an investment.
Using the above example of 1000 shares of Guinness shares purchased, if Guinness pays a dividend of N5 per share, the investment income will be N5 x 1000 shares = N5,000.
Another example is investing N10,000 in a bank so as to generate monthly interest on that investment. If the bank gives you a rate of 10% for a year, your investment income will be 10% x N10,000 = N1,000, in a year.
The key difference between capital gains and investment income is that capital gains is reliant on the initial capital expenditure put down to make that investment, while investment income is not reliant on the appreciation of the initial capital expenditure put forward.
This article was first published on Nairametrics on September 1, 2016.