When it comes to investing, there are three ways you can make money from owning a share of common stock.
The initial dividend yield you collect
The growth in intrinsic value per share, which will fund dividend increases and capital gains
The change in valuation applied to the firm's earnings (i.e., how much every $1 in profit is valued)
When it comes to owning a bond, there are also three ways you might be able to make money.
The interest income you receive on the money you loaned the bond issuer.
The capital gains generated by buying a bond prior to a drop in interest rates or following an increase in the credit quality of the bond itself.
Special operations from unique circumstances, like conversion privileges being attached to a bond allowing you to swap it for common stock under certain scenarios.
When making a new commitment with your hard-earned money, it's often best to identify, clearly and specifically, how you think you are going to make your profit. This one disciplined practice can help you avoid major bubbles as others get washed away by over enthusiasm, paying too much for their holdings.
