Capital Gain vs Cash Flow Investment
“Capital Gain” and “Cash Flow” are the main 2 reasons why people invest.
Capital gain investment is an investment that aims for increase in the value of the investment (can be shares, mutual funds or properties) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year). A capital loss is incurred when there is a decrease in the capital asset value compared to an asset’s purchase price.
Cash flow investment is an investment that aims for continuous passive income which enable money to flow in on a regular basis, with little effort required to maintain it.
I personally see more people investing for capital gains rather than cash flow. In stock market, a lot of people are buying warrants and penny stocks. These are the stock instruments aim to earn capital gains at lower costs. In property market, many people are buying new properties under construction. I viewed this as Capital Gain investment as the underlying potential of capital gains is higher than the cash flow.
There is actually no wrong or right as to which type of investment you should make. Normally people will start off with capital gain investment to make their initial capital bigger. However, the ultimate goal of the investment shall be cash flow investment.
Cash flow investment enables financial freedom. Capital gain investment can be used initially to generate more cash to carry out cash flow investment. For example, when you have only $1000 in hand, it is difficult to get a good cash flow investment. Hence, short term capital gain investment can help you to generate more cash. It is better not to invest long term for capital gain as it is always being affected by the economy crisis.
Wrong perception of cash flow investment:-
- Saving – Many people think that interest generated from saving is a form of cash flow. In fact, it does generate cash flow. But it is not a form of investment. The interest generated cannot fight the current high inflation rate. The average annual interest rate in Malaysia is around 3%, with the current inflation rate, saving money in the bank for the interest is actually making you to lose more money.
- Stock – some stocks pay dividends which are a form of cash flow. In fact, many retirees live on dividends from their stocks. But, during economy down turn, these stocks could suffer from capital loss. So, staying calm on investment is the key to successful investment journey. If you are investing for cash flow investment, ignore the temporary noises (prices up and down) when the market moves. In general, stock will move up in price if the company’s fundamental is good. Change investment decision only when the company’s fundamental has changed.
Other forms of cash flow investments:-
- Business – business that can generate passive income – not the small business that enable you to own the “job” (meaning there will be no income if you do not operate the business).
- Rented properties – rented properties provide you monthly rental income with minimum effort
- Royalties – publishing books, having intellectual properties.
By understanding the above, hope you can make the correct choice when you do investment. When you need more capital, choose capital gain investment. When you need income, choose cash flow investment.
I have initially started with more capital gain focus investment and now have slowly switched my portfolio to focus more on cash flow investment to generate more passive income for me. If you wish to know more about my journey, you may follow me on Facebook. Let’s move forward to financial success and financial freedom.
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