The motive behind any investment is to make more money, whether in the short term or in the long term, and no matter the form in which it comes. There are two major forms in which the returns can come, either capital gains or investment income.
Both terms are briefly illustrated below:
Capital Gains can be defined as the gains one makes on the capital when the value of any investment increases. For example, if you bought 100 units of Facebook shares in the year 2015 at N10 per unit. It means you have incurred a total expenditure (or cost) of N10 x 100 units = N1, 000.
If the share price of Facebook rises to N20 per unit in year 2016, and you decide to sell at market value, your total income at this point will now be N20 x 100 units = N2, 000.
Therefore, the capital gain on your Facebook shares will be N2, 000 – N1, 000 = N1, 000.
Investment Income, on the other hand, is all about interest received, or dividend paid on an investment. Using the same illustration as the one above, of 100 units of Facebook shares purchased, if Guinness pays a dividend of N5 per unit, the investment income will be N5 x 100 units = N500.
Another example is investing N1, 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 N1,000 = N100 in a year.
The key difference between capital gains and investment income is that the former is reliant on the initial capital expenditure put down to make that investment, while the other isn’t.