Dear Nancy,
I’m a new investor and I am just starting to earn money and save. Can you please explain the basics of how a person can make money through investing?
Olivia
Dear Olivia,
There are two basic ways money makes money. Income, be it interest from a bank account, GIC, bond, etc – and price appreciation. The value of something can be sold for a price higher than what you bought it for. That price that you sell something for is purely based on what the buyer is willing to pay for it. Usually that price is influenced by supply and demand. The less the supply, the more someone is willing to pay because of its scarcity. The more demand there is (the more people wanting to buy that thing) can raise the price again due to scarcity.
Once you have investments keep in mind those two methods.
I’ve used this loose analogy before, but I think it’s worth repeating.
Think of your money like a herd of cows. The cows produce milk (income in the form of interest or dividends). They also multiply and make baby cows (price appreciation makes an investment worth more). The more cows you have, the more income you will receive, hence the more the total value will increase. You must be cautious not to sell off too many cows and reduce the herd. Less cows means less milk. You can always sell off part of an investment, but be mindful that if it is income producing, you will have less interest or dividends. Money makes money.
Nancy Woods is senior portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her blog, “Nancy’s Notes” at nancywoods.com or send her your question to asknancy@rbc.com