6 Ways to Earn Capital Gains
There are basically two types of investment income. Capital gains and investment income.
Investment income is the income you receive from an asset, examples of investment income are interest on savings, rent on property, and dividends on stocks.
Capital gains are the increase in value of an asset; Examples of capital gains are the increase in the value of property, stocks, and other assets.
Some investments provide capital gains but not income; Examples of these are precious metals like gold, bitcoin, antiques, and other collectibles.
Here are investments that provide capital gains:
the stock market
The stock market offers excellent opportunities for capital gain. For most people, investing directly in the markets is not an option because the transaction fees once charged for buying and selling shares make it not worth it. However, there are many managed funds that investors with limited means can participate in. Sharesies in New Zealand is one. Investors can inject money into the markets with Sharesies and there is the option to invest in multiple funds or individual companies. Other similar platform types in New Zealand are Investnow, Kernelwealth, and Hatch. Although these are not the only ones.
Your retirement plan invests in managed (mutual funds) and they are also a form of capital gains. In New Zealand, joining Kiwisaver is a no-brainer. Kiwisaver is New Zealand’s retirement plan.
Property
The real estate market has been a popular Captain Gains tool for many investors who use not only their money, but also other people’s money in the form of a loan. The income is obtained from the rents that pay the mortgage. All related costs are the most popular form of capital gains and the easiest for the novice investor to dip their toes in the markets and learn as they go because there are several mutual funds available and startup costs are minimal. In New Zealand, Sharesies only cost $1 to enter, giving you the opportunity to invest in managed funds or individual companies. It’s a great way to tax deductible. This type of investment can turn into custard like unruly tenants. If you are prepared to take the risk, then this investment can go ahead.
Your own home is a good source of capital gains if you intend to sell it at any time.
Another way to get on the property ladder is to buy shares in real estate investment companies on the stock market. This can be done by investing in individual companies or managed funds that invest in property.
Compound interest
You must have heard of compound interest; that is, when you invest in fixed-term accounts for an interest of x%. Instead of receiving your interest payments in your bank account, you allow them to be added to your principal and earn interest on your prior principal and interest payments. This is called compound interest.
The increase in your capital is called “Capital Gains.”
Interest rates are very low today (2020); in some cases, lower than the inflation rate, making this type of investment less attractive. Therefore, it is important to do your due diligence and not be tempted by some finance company that offers higher than normal interest rates, because with higher interest rates, risk increases. These finance companies that offer higher interest rates lend to riskier types of borrowers.
I’m not saying you shouldn’t invest your money in these companies, but do your due diligence and at least diversify your portfolio instead of investing all your life savings in one company.
Gold
This is purely speculative, but it can be a good hedge against a downturn in the markets. The only downside to gold is finding a place to store it. Another way to invest in gold is to buy gold shares in the stock market. Another option is to buy gold coins on auction sites like eBay and Trademe. As with other investments, it pays to do your homework and read all you can about gold and other precious metals.
crypto currency
Cryptocurrencies like Bitcoin and the like should be treated as speculative investments, so only invest money in this if you can afford to lose it. What I am saying is use your discretionary income to buy cryptocurrency. This type of investment can be a roller coaster, but one tip that can be helpful is to not just buy all of your crypto in one transaction, but to do it weekly, bi-weekly, or monthly so that there is a chance that you may have made a purchase when the coin it is low. It’s called averaging.
Collectibles/Antiques
Investing in collectibles can give you a sense of satisfaction and profit when you intend to sell. You really have to know your stuff when it comes to antiques. Always remember, something is only worth what others are willing to pay. If someone is willing to pay $1,000 for a painting at auction, then that’s what it’s worth; however, if another painting sells at auction for only $10, then that is its value. The value of something is just a matter of opinion.
Recently (2020) some Banksy paintings sold for over $100,000 in New Zealand. The seller of the paintings paid a total of $500 for them in London (UK) a few years earlier. It just goes to show how one’s eye for a bargain can be profitable.
For smaller items such as postage stamps, banknotes, beer labels, etc., collectors can post their duplicates on auction websites to help finance their hobby.