Wednesday, May 4, 2011

Are You Investing for Cash Flow or Capital Gain?

If you understand the question in the title of this article, then you understand two of the most basic concepts in investing and the answer is easy. If you don't understand the question, read on for a bit. By the end of this article, you will have a good idea of why investing for cash flow may be much more attractive than what most investors do (investing for capital gains).

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.

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.

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.

Most Investors are Capital Gains Investing
Most investors who are putting away money into their Roth or 401(k) retirement accounts are doing so in some kind of mutual fund. While it is easy to do, and usually requires very little input, you have no control over the mutual fund, and you only make money if the value of the fund goes up and you sell part or all of your mutual fund investment.

If you needed to live off of that retirement fund, and you are having a very good year, you don't have to cash in your principle, only some of your profits. Not all years are good, and in some years the value will go down.

A more aggressive investor may actively trade mutual funds or even individual stocks, but the same problem remains in that you have to sell something at a higher price than you bought it in order to get some of your cash out.

Cash Flow Investing and the Stock Market
The story is different for cash flow investors, especially those who use covered calls and other more sophisticated methods to invest. Unlike the typical mutual fund or individual stock investor who only gains if the price goes up and part of the investment is sold, a cash flow investor can use a combination of calls and stock purchases to create an investment that can be made to create a cash flow without selling part of your investment.

It isn't magic, it is a different way to invest than what most investors do. For example, in a covered call, you use your own money to buy the stock, but you sell the call to another investor. Several things can happen, and they are mostly good for the covered call investor. Without going into detail, the investor can make money of the stock goes up in price, if the stock price doesn't change, and sometimes when the price goes down. In any case, as soon as you create a covered call, you have cash flow in the form of the money you got from selling a call to another investor.

How is this possible?
The key is that when you create a covered call, you are using some money from other investors, and this money is the source of your initial cash flow. In the best case scenario, you can take cash out of your investment to spend it while not touching your original investment at all.

What Should I Do If I Want to Know More?
If you want to know more, there are many resources that you can use to learn in depth about this kind of investing, and how you can be taught to make the kinds of trades you need to make in order to invest for cash flow. If you want to know more, subscribe to the mailing list and you will be sent additional information on how you can receive many free hours of training that will give you the tools to become a cash flow investor.

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