When a person has a portfolio, he can receive income from it in a number of different ways. For example, if some of his assets bear dividends, then he should receive regular payments of these dividends when the companies in his portfolio announce their profits. However, the investor may also receive royalties. The income from royalties is different than the income from portfolios in several ways.
Most portfolios contain assets and can provide income, profits and losses multiple ways. For example, if a person holds a bond, then he can expect to receive a regular infusion of cash from the persons making payments on the bond. If he has stocks, then he can receive dividend payments. In addition, the person can choose to sell appreciated assets from his portfolio, thereby earning a profit.
Royalties are payments made to an individual on commission. These payments are linked to the sale of a particular asset, often a natural resource or intellectual property. So, for example, if an author sells a book, then he will likely receive a certain amount of money each time the publishing house sells his book. The payment made to the author constitutes a royalty.
One of the main differences between money made from a portfolio and money made from a royalty is how they are taxed. When a portfolio increases in value and the investor sells off part of it, then the profit that the individual receives from the sale is taxed as a capital gain. By contrast, royalties are taxed like regular income, which usually carries a higher federal tax rate.
Money derived from royalties can also be considered considerably less risky than money that comes from portfolios. When a person buys an investment, he wishes for the investment to appreciate in value, but the investment may actual depreciate, meaning he will suffer a loss. Say, for example, if a borrower defaults on a bond payment, the investor may lose money. There is not the same potential for loss from income derived from royalties.
- "Economics"; Roger A. Arnold; 2009
- "Investing For Dummies"; Eric Tyson; 2008