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Financial Fridays: What Is Return?
1 / 12 / 2018
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Return is often mentioned in finance, but what does it mean - and how does it relate to risk?

Financial institutions want your money. To encourage you to choose their services, they offer financial incentives. If you make money when you deposit, save, or invest your cash, that’s known as return. But financial return comes in different forms, depending on how it’s earned.

Interest
Banks provide customers with a place to store their money in return for the opportunity to loan out or invest that money for profit. When you deposit your cash into a checking or savings account with your bank it may earn interest – a financial reward in return for lending your money. The interest rate offered by the bank often depends on factors such as economic conditions and other interest rates in the market. Savings accounts usually give higher interest because you’re less likely to withdraw your money, so the bank is freer to use it.

 

When you invest your money, you are purchasing an asset in the hope that it will grow in value over time. There are a few different ways that that can happen.

Dividends
When a company makes a profit it can invest those funds back into the business or it can return the value to its shareholders. When value is returned this is generally in the form of a dividend – a cash payment to everyone that owns shares in the company. You can find out more here.

Capital Appreciation
Usually when you purchase a financial asset, its price is determined by the market. Over time the market may consider the asset to be worth more than when you bought it. An extreme example of this is Bitcoin, which has been in the news for its fluctuating valuation. When the valuation rises, it’s known as capital appreciation. You can find out more here.

Coupon
A coupon is the payment of an agreed interest rate on a fixed income asset, otherwise known as a bond. It is usually paid on a semi-annual basis, and when the bond expires. The name ‘coupon’ derives from the physical coupons that used to be attached to the bond certificate. Bond holders would tear these off and redeem them for their regular payments. You can find out more here.

Remember: Return is intimately connected with risk.

Investments can provide higher returns than bank interest because you are taking a greater risk investing your money than saving it with the bank. If the return for investing and saving were the same, no one would invest. When considering that investing could provide a higher return, remember that no return is guaranteed, and people should only invest when they would be able to sustain losses.

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