Clara Kim, registered teacher and JUNO's educator, explains how you can earn income from investments.
Recently I was at a secondary school in New Plymouth teaching students about passive income and the power of compounding interest. A student enthusiastically interrupted the lesson to inform me he was an investor himself. He explained he would purchase limited edition sneakers and then sell them a few months later for a much higher price. This got me thinking about the different types of income earned through investments and how it works.
This students’ savvy business skills demonstrate how income can be earned through capital gain. Over time there was an increase of value in the asset (sneakers) and he was able to earn money from it. When you invest through an actively managed fund, like JUNO, the portfolio managers look for companies where they see potential growth. They will purchase shares in the company with the hope that when they sell, it will be worth more than what they bought it for.
Markets often price assets incorrectly. Sometimes assets are more expensive than they are worth, and sometimes they are cheap. This provides opportunities for the portfolio managers to try and take advantage by watching carefully and investing actively.
Why do share prices go up and down?
Share prices go up and down on a moment to moment basis due to supply and demand. If more people want to buy shares (demand) rather than selling it (supply), the price moves up. However, if more people want to sell their shares over buying them, the demand goes down and the share price will fall.
Demand can be driven up or down by the activities of a company. For example, if it comes to light that a company is being sued, that will drive demand down as a number of shareholders attempt to sell their portion of the company. With so many shares available and not many willing buyers, the share price will fall. Likewise, if it comes out that a company has landed a lucrative contract, there could be an increase in the number of willing buyers driving the share price up.
Another way, you can earn money from your investment is through dividends. This is where a company will pay out some of its profit to its shareholders, usually either in the form of cash or additional shares. Cash dividends are paid based on the number of shares you own. For example, if you held 100 shares in a company, and the dividend was $0.50 per share, you would receive $50 back. Not all companies will pay dividend as some may choose to reinvest their profits into the company. There is an expectation that profits reinvested into the company will translate to an increase in the company value.
Published 21 November 2019
By Clara Kim, registered teacher and JUNO's educator
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser before relying on the content. All content is correct at time of publication date.