When you invest money, you’re looking to earn a return—essentially, how much you make or lose over time. Here are the main types of returns you need to know about:

1. Capital Gains

What It Is: You obtain an additional amount from selling an asset for more than you paid. For example, you buy a laptop for €1000 and sell it later for €1100. Your capital gain is €100.

2. Dividends

What It Is: Money paid to you by a company from its profits. For example, you as investor own shares in a company, for which they pay you €2 for each share every year.

3. Interest Income

What It Is: Earnings from lending money, like in a savings account or bonds. For example, you put €100 in a savings account and earn €2 in interest after a year.

4. Realized and Unrealized Gains/Losses

When you invest, you might notice that the value of your investments can change over time. These changes are called gains if they’re positive, and losses if they’re negative. There are two main types of these changes: realized and unrealized.

Realized Gains/Losses:

Imagine you bought a share of a tech company for €50. A few months later, the stock’s value rises to €65, and you decide to sell it. The moment you sell the stock, you lock in your profit. This profit, €15 in this case, is known as a realized gain because you have actually sold the asset and secured the profit. Think of it like buying a toy at a flea market for €10, then selling it later for €20. The €10 you made is a realized gain because you completed the transaction.

Unrealized Gains/Losses:

Now, imagine instead of selling the stock when it reached €65, you decided to keep it. While you haven’t sold the stock, on paper, its value has increased. This increase in value, from €50 to €65, is an unrealized gain because you still hold the investment. It’s like having that smart watch you bought for €100 and finding out it’s now worth €150. The watch is still on your wrist, so the gain is unrealized because you haven’t sold it yet.

5. Total Return

Now that you know these concepts, the total return is the combined return from capital gains, dividends, and interest.

Consider you own a stock, which increases by €20, and you also earn €5 in dividends and €3 in interest. Your total return is then €28. Simple!