Episode 56: What Works Wednesday: The Three Ways Investments Make Money

Welcome back to What Works Wednesday with your host, Leland Gross, and today we’re simplifying how investments make money.

Investments typically generate returns in three ways:

Dividends: Companies share profits with shareholders.

Interest: Earned from lending money through bonds or savings accounts.

Appreciation: Increase in the value of assets over time.

Understanding these can help you make smarter investment choices and grow your wealth effectively. Tune in to learn more!

Transcript:

Welcome back to another episode of What Works Wednesday. I'm your host, Leland Gross, and today I want to talk about the three ways that investments make money. Because I get a lot of misconceptions or misunderstandings around this, and I think people understand I invest my money to make money. But how that actually works and how different investments work together and why you use different investments doesn't really compute to a lot of people. But it's honestly very simple.

there's three kind of main ways that investments make money. The first is dividends, second is interest, and third is appreciation of the value of an investment. So let's break down each of those three things and then we'll talk about how to think about that. So number one, dividends. First, when we choose investments, we choose either equity or debt holdings, which don't get to

caught in the weeds on that. Equities would be stocks, which is ownership of a company. If you own a share of Apple, you are part owner of Apple. Now you might be a very, very fractional owner, but an owner nonetheless. So you get to reap the reward of owning a company. Which for dividends, that would be, hey, we've got profit. Apple decides, hey, this year we made so much money.

above our expenses, so we've got profit, and we're gonna distribute that to the owners. So everybody who owns a share of Apple's gonna get X amount of money when we give out dividends. So dividends are a share of the profit of a business. So a little check sent to you because you are part owner. Now most of the time that hits your investment account and you reinvest that. You don't have to reinvest it, it's a setting, you could have them just send it to you.

But most of the time you're just gonna reinvest it, meaning you get that dividend check in and it's $50 and you just repurchase more Apple stock or more other investments using that $50. So that's a dividend. It's a share of the profit of a company distributed to you because you are part owner of that company as a reward as the owner. Next is interest. So we talked about equities. Now there's debt holdings.

where you are essentially giving a loan to either the US government in the form of a bond or to a bank in the form of a CD or a high interest savings account where you're saying, here, you hold my money. And they say, great, we will pay you interest to hold your money. And how that really works, the contractor signing is they are free to use that money as long as you are able to recuperate your money with interest.

after the set amount of time. So for high interest savings, they can use your money, but if you need that money, they have to be able to give it back to you with interest. Or with a bond or a CD, you say, hey, you can have it for six months, for a year, for three years, five years, 10 years, depending on the length of the security, the debt or treasury note. And they say, great.