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The following article is part of an ongoing educational series. The previous article can be found here.

Once you've distinguished between investment and speculation, there's another important distinction about the type of shares that you buy. But first, let's take a step back and look at interest-bearing investments.

Interest-bearing investments and shares don't just differ in the level of returns that you are likely to receive over longer periods of time - they also differ in the way you receive those returns.

If you buy a three-year debenture for $3000 paying 6 per cent interest, after three years you receive your original $3000 investment plus the interest you earned along the way. If you invest the same amount in shares, however, you can potentially benefit not in one way but in two.

Firstly, you get the interest you earn along the way, only it's not called interest - it's called dividends. Secondly, you have the potential to make a capital gain on the original $3000 investment.

A capital gain is the difference between the price of a share when you sell it and when you bought it (although you'll still have to pay capital gains tax on the difference, so your hip-pocket profit will be somewhat lower).

The capital value of a $3000 company debenture is always $3000. The capital value of a $3 share, however, can jump to $4. Of course, it can also fall to $2, so there's the added possibility of capital loss.

Income stocks

Some stocks tend to pay relatively high dividends and may therefore produce less in the way of capital gain. That's because every dollar that is paid out as a dividend is a dollar that the company is not able to channel back into its own growth.

The companies behind these types of stocks normally have reasonably stable income streams themselves, so, in turn, they're able to be fairly sure about meeting regular dividend payments to their shareholders.

Listed property trusts, for example, receive returns in the form of rental income. These come in pretty much like clockwork, rain, hail or shine - although income may slow during an extended slump in the economy.

While banks are sensitive to the interest rate cycle, every time you put your PIN into an automatic teller machine, queue for 45 minutes to reach the counter, or click a transaction from your home computer, your bank usually takes a cut. This makes cash flow far more predictable and, hence, more manageable, than the days when consumers saw banks as a community service and account fees were little more than a glimmer in a back-room accountant's eye.

Stocks with these characteristics are typically referred to as income stocks because investors, particularly retirees, may use them to provide a regular income.