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Do you know your cash flow from your capital gains?

When it comes to investing, words and definitions matter. If you don’t understand the question in the title of this article, then you might be easily fooled by a fast talking financial salesperson, or you may pass up an outstanding opportunity because of your lack of knowledge. If you are confused by the terms in the article, stick around, by the end of this article, you will have a good idea of the difference between cash flow type investment and a capital gain type investment.

The basic definitions are simple enough:

  • Capital Gains – If you invest for capital gains, your goal is to sell something for more than you bought it. In order to receive the gain, you typically no longer own or control the asset. Stocks that don’t produce dividends are a classic capital gains investment. Another type would be investing in unimproved land.
  • Cash Flow – If you are a cash flow investor, your goal is to receive a series of cash payments from your investment, and you typically still own or control the asset. Long term ownership of dividend producing stock fits this model, as does investing in rental real estate.
  • This is a very, very simplified description of the different between cash flow and capital gain investing, and you can read any number of books that go into the details. Depending on what kind of investing you are doing, you probably have to have a completely different approach depending on which kind you are doing.

    The key to remember is that any type of investment vehicle may include both cash flow and capital gains. Whether one type or another is best for you depends on the investment and a variety of other factors, including your near term and long term needs for a return on your investment.

    For example, if you are investing in a company that specializes in advertising on radio, if you purchased the company and intend to keep it for several decades, you may want to do so only if it is a cash flow type investment so that you can pay the employees and other overhead costs. If you think that radio will be a dead medium in five years, you may want to take a capital gains approach and position to sell the company quickly, and profitably.

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