How can you earn money through investing?

There are a few ways you can grow your money through investing. Your investment can earn income through interest, dividends, and capital gains, helping increase the value of your original investment.

Investment
An investment is something you buy to earn income or to grow in value over time.
Learn more about how you can earn income from investing, how your earnings may be taxed, and how to manage your investment risks.

How does your money grow when you invest?
Investing can help your money grow over time. This growth can come from interest, dividends, and capital gains.

1. Interest

Interest pays you a percentage of your investment over time. With simple interest, you earn a percentage of your original investment. But with compound interest, your balance grows each year because the interest is added to your investment, so you earn interest on a larger amount each year. Compound interest can help your money grow faster.

Some investments, like Guaranteed Income Certificates (GICs) and bonds, pay interest. One benefit of these investments is that you can usually know in advance how much money you’ll earn.

Compound interest is a useful tool in any saving or investing plan. You can use a free compound interest calculator to see how it works.

2. Dividends

Dividends are a way to earn money by investing in stocks. When you own stocks (also called shares), you own part of a company. Dividends are payments made to shareholders from the company’s profits. These can provide regular income and can either be reinvested or taken as cash.

Not all stocks pay dividends. For those that do, the amount and frequency of dividend payments depend on the company’s performance and the type of shares. Common and preferred shares may both pay dividends, but preferred shares often follow a set schedule.

3. Capital Gains

A capital gain happens when you sell an investment for more than you paid for it. This usually applies to investments such as stocks, bonds, mutual funds, ETFs, and even crypto assets.

Real estate is also considered a type of capital property. So, if you sell property or land at a profit, you will also have a capital gain.

If you sell an investment for less than you paid, it results in a capital loss. This loss can be used to reduce your tax on any capital gains. For more details, check with the Canada Revenue Agency.

There are different ways to grow your money depending on the kind of investment. Each one comes with its own level of risk and ease of access. Some investments are easier to cash out than others if you need money quickly. Learn more about various types of investments.

How are your investment earnings taxed?
Money earned through interest, dividends, or capital gains is usually counted as income and may be taxed. Whether it is taxed depends on the kind of account you hold your investments in.

If your investments are in registered accounts like a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), they are tax-sheltered. This means your money grows tax-free while it stays in the account and is not counted as taxable income.

However, the rules vary depending on the account. For example, with RRSPs, you pay tax when you withdraw your money. But with TFSAs, withdrawals are not taxed. Always check the contribution and withdrawal rules of the account you use.

If you invest through non-registered accounts, such as with an investment broker, the earnings do not have tax shelter. This means they are considered taxable income.

You will receive a tax slip showing your earnings from investments or savings. Keep these slips safe, as you’ll need them to report your income correctly on your tax return. Learn more about how taxes impact your investments.

It is also a good idea to keep track of your investment returns. If you use a financial advisor, they might handle this for you. If not, you can calculate your returns on your own. Learn more about tracking investment returns.

The longer you leave your investments to grow, the more you can benefit from compound interest, dividends, and capital gains. It’s never too late to start. Always consider how much time you have to reach your financial goals.

How can you balance risk and return?

Interest, dividends, and capital gains are all ways to make money from investing. But they come from different investment strategies. Since returns are not always guaranteed, it’s important to think beyond how much you hope to earn. You should also consider how much risk you’re comfortable taking and how to reduce that risk through strategies like diversification and dollar-cost averaging.

Know your comfort level with risk

When choosing investments, make sure they match your level of risk tolerance.

In general, the more you hope to earn from an investment, the more risk you take. If you’re comfortable with more risk, you might earn higher returns—but you could also lose some or all of your money. On the other hand, lower-risk investments tend to offer smaller returns, which might not even keep up with inflation.

The benefit of diversification

Diversifying your investment portfolio means owning a variety of different types of investments.

The value of an investment can rise or fall, sometimes suddenly. This can happen due to changes in the stock market or larger economic events. These changes are known as volatility. Some investments, like GICs, have low volatility, while stocks may have high volatility due to frequent price changes.

By diversifying, you spread out your risk. If one investment performs poorly, you won’t lose all your money. Other investments in your portfolio may perform well and help offset any losses.

The benefit of dollar-cost averaging

Because the value of investments goes up and down, investing a large amount at one time can be risky if values drop afterward. Dollar-cost averaging means investing smaller amounts regularly over time to reduce this risk.

For example, instead of investing $12,000 all at once, you could invest $1,000 each month. This approach helps even out the cost over time as you buy investments at both higher and lower prices.

Dollar-cost averaging can also make it easier to plan your investments around your monthly budget. You can invest small, regular amounts that you know you can afford, helping you stay on track toward your goals.

One benefit of dollar-cost averaging is that it takes away the pressure of trying to time the market. This makes it a helpful strategy, especially if your investment goals are long-term.

Still, there are some downsides. You might pay more in transaction fees, depending on how often you invest. Also, you could miss out on gains if you don’t invest more money early when values are low and rising.

Understanding your personal risk tolerance is important when building your investment plan. If you take too little risk, your money might not grow enough. If you take too much risk, you could face big losses. Learn more about the role of risk in investing.

Summary

• You can make money from investing through interest, dividends, and capital gains.
  
• If your investments are in a registered, tax-sheltered account, your returns may not be taxed.
  
• If your investments are in non-registered accounts, you need to report the income on your tax return.
  
• If you experience a capital loss, you may be able to use it to reduce your tax on capital gains.
  
• When investing, always consider both how much your money can grow and how much risk you’re comfortable with.
  
• You can reduce risk by using strategies like diversification and dollar-cost averaging.