Profit, Profits

November 23, 2010Investingby EconomyWatch


From an accounting perspective, profit is the difference between the price and cost of a product or a service. From an economic perspective, profits are the gains derived from an investment when the total returns exceed the invested capital. Profits are generally measured over a period of time.


Types of Profits

Profits can be of several types:

  • Net profits: Net profits can be calculated by subtracting overall expenses incurred for the normal running of a business from the gross profit.

  • Net profit after interest and taxation: The profit after the deduction of taxes to the government and interest payments on loans is called net profit after interest and taxation.

  • Retained profit: This is the profit that is left over after a firm pays off dividends to its shareholders.

  • Economic profit: This profit is realized from a product when revenues generated from it are higher than the total opportunity cost of its input materials.

  • Accounting profit: This is the difference between revenues and accounting costs paid for inputs.

  • Normal profits: This is the opportunity cost of labor and capital.


How can Investors Make Profits

While it is crucial to understand how companies declare profits, what is most important for an investor to understand is realized profits, or the actual profits that he or she makes on an investment. This is the approach that should be taken to maximize realised profits:

  • Always begin with determining your investment goals.

  • Define your risk profile. If you are many years away from retirement, you can take greater risks.

  • There is always a risk-returns trade-off. While the stock market is more risky than the bond market, bonds are not as attractive as stocks for growing your wealth.

  • Margin accounts are ideal for buying stock you can not afford. However, your losses can also be very high. So, it is important to use leverage sensibly.

  • Investing in funds is a safer way to gain exposure to the stock market. Achieving the same level of diversity by buying individual stocks could prove to be very expensive.

  • Invest with a long-term horizon. Even when a market slumps, be patient.

  • Keep updating your knowledge of the investment options available and formulate investment strategies that suit you.


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