Which of the following best describes how an investor makes money from an equity investment?

• A. By receiving guaranteed principal repayment at maturity
• B. By collecting rental income from the company's physical assets
• C. By earning fixed interest payments regardless of company performance
• D. By receiving dividends and realizing capital gains when the stock price increases

Answer: (D)

Verified step by step guidance

1. Understand the nature of equity investments: Equity investments represent ownership in a company, typically through purchasing shares of stock. Investors do not receive guaranteed payments or fixed returns, as these are characteristics of debt investments like bonds.
2. Clarify the concept of dividends: Dividends are payments made by a company to its shareholders, usually derived from the company's profits. These payments are not guaranteed and depend on the company's financial performance and dividend policy.
3. Explain capital gains: Capital gains occur when the value of the stock increases above the purchase price. Investors can realize these gains by selling the stock at a higher price than they originally paid.
4. Differentiate equity investments from other types of investments: Unlike bonds, equity investments do not provide fixed interest payments or guaranteed principal repayment. Additionally, equity investors do not collect rental income from the company's physical assets, as this is unrelated to stock ownership.
5. Summarize how investors make money from equity investments: Investors earn money through dividends distributed by the company and by realizing capital gains when the stock price appreciates. These earnings depend on the company's performance and market conditions.