There are two different ways to make money from investing: growing the value of your money, or getting an investment income – or a bit of both.

How does investing make you money? video image
Video transcript

Investing can make you money in one of two ways. Growth and or income. Funds aim for either income, capital growth or both. Growth focussed funds seek to increase your invested cash over time.

Typically they target expanding businesses where profits are being reinvested to widen operations perhaps across different markets. If a company is successful and grows more profitable over time the value of its shares should increase.

A growth orientated fund is more suited to someone thinking long term as they have the time to let the value grow.

Conversely income funds aim to generate regular payments from your investment. Typically income from these funds and investment trusts will involve shares that pay a regular dividend. Firms that pay dividends tend to be larger and more established.

Broadly speaking income strategies are a less risky alternative to growth and suit investors preferring regular earnings.

Income style investments complement older investors especially the retired who are looking for income to replace salaries they used to receive, or to augment their pension.

If you don't extract that dividend and instead choose to reinvest it you can increase your stake in your investment. This is called compounding.

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