HOW DO I ACTUALLY MAKE MONEY FROM BUYING STOCK?
If you listen to financial media or investment media, you might get the wrong impression that making money from buying stocks is a matter of "choosing" the right stock, trading quickly, fixating on a computer or television screen, and spending your days obsessed with what the Dow Jones Industrial Average or S & P 500 did recently. Nothing could be further from the truth. This is certainly not how I run my own portfolio and the portfolio that we control in my family's asset management company.
In fact, the secret of making money from buying shares and investing in bonds was concluded by the late father of Benjamin Graham's investment value when he wrote, "Real money in investment must be - because most of it was in the past - not because of buying and selling, but because it has and hold securities, receive interest and dividends, and benefit from the increase in long-term value. "To be more specific, as a common stock investor, you need to focus on total returns and make a decision to invest in the long term, which means at an absolute minimum level, expect to hold every new position for five years if you have chosen a well-run company with strong finances and a history of friendly management practices for shareholders.
That is the way real wealth is built on the stock market for passive investors outside. That's how:
Supervisors approach nearest minimum wage, such as Ronald Read, collect more than $ 8,000,000 in their portfolio;
A man named Lewis David Zagor, who lived in a small apartment in New York City, raised $ 18,000;
Prosecutor Jack MacDonald raised $ 188,000;
Retired IRS agent Anne Scheiber built a $ 22,000 portfolio (in 1995 when she died, adjusted for inflation, equivalent to $ 63, 250,000 + by early 2016);
Retired Secretary Grace Groner built his stock portfolio worth $ 7,000,000;
A dairy farmer near Kansas City raised millions of dollars in dollars, which his children didn't even know.
In fact, high-profile investors like Warren Buffett and Charlie Munger make the most of their money for stocks and businesses they have for 25+, even 50+, years. There are still many new investors who do not understand the real mechanics of making money from stocks; where actual wealth comes from or how the whole process goes. If you have spent a lot of time on this site, you will see that we provide resources for a number of topics that are quite advanced - financial statement analysis, financial ratios, capital gains tax strategies, just to name a few, but these are important things to do . Clean it so take a cup of hot coffee, feel comfortable in the chair, read your favorite,
Making Money from Stocks Starts With Buying Ownership in Real Operational Businesses
When you buy shares, you buy a company. Imagine that Harrison Fudge Company, a fictitious business, has sales of $ 10,000,000 and a net profit of $ 1,000,000.
To raise money for expansion, the company founders approached an investment bank that sold it to them. public in the Initial Public Offering, or IPO. They may say, "Well, we do not think your growth rate is so good that we will give this price so that future investors will earn 9% of their investment plus whatever growth you generate ... that earns about $ 11,000,000+ value for the whole company ($ 11 million divided by net income $ 1 million = 9% return on initial investment). "Now, we will assume that the founders sold out entirely instead of issuing shares to the public (for an explanation of the difference, see Investing Lesson 1: Introduction to Wall Street.)
The underwriter might say, "You know, we want the stock to sell for $ 25 per share because the price is affordable so we will cut it. The company becomes 440,000 pieces, or shares (440,000 shares x $ 25 = $ 11,000,000.) That means that each "discount" or stock is entitled to $ 2. 72 of profit ($ 1, 000, 000 profit ÷ 440,000 outstanding shares = $ 2. 72 per share.) This figure is known as Basic EPS (short for earnings per share). In other words, when you buy a stake in Harrison Fudge Company, you buy the rights to your pro rata.
Whether you get 100 shares for $ 2, 500, you will buy $ 272 in annual profits plus the future growth (or loss) that the company generates. If you think that new management can cause fudge sales to explode so your pro-rata profits will be 5x higher in a few years, then this will be a very attractive investment.
How much money you make from shares will depend on how management and directors allocate your capital
What matters is that you don't actually see $ 2. 72 in the benefits that are yours. Instead, management and the Board of Directors have several options available to them, which will determine the success of your large-scale ownership:
You may send cash dividends for some or all of your profits. This is one way to "return capital to shareholders." You can use this cash to buy more shares or spend it as you see fit.
1. He can buy back shares in the open market and destroy them. For a good explanation of how this can make you very, very rich in the long run, read Stock Buy Backs: The Golden Egg of the Shareholder Value.
2. This can reinvest funds into future growth by building more factories, shops, employing more employees, increasing advertising, or a number of additional capital expenditures that are expected to increase profits. Sometimes, this may include seeking acquisitions and mergers.
3. This can strengthen the balance sheet by reducing debt or building liquid assets.
4. Which is best for you as an owner? It depends entirely on the level of management returns that can be earned by reinvesting your money. If you have a phenomenal business - think of Microsoft or Wal-Mart in the early days when they were a small part of their current size - paying cash dividends might be a mistake because the funds could be reinvested at high prices. . Actually there was a time in the first decade after Wal-Mart announced that they were getting more than 60% of shareholders' equity. It was incredible. (Look at DuPont's desegregation of ROE in a simple way to understand its meaning.) The results of such returns are usually only in fairy tales, under the direction of Sam Walton,
Berkshire Hathaway does not issue cash dividends while US Bancorp has decided to return 80% of the capital to shareholders in the form of dividends and share repurchases annually. Apart from these differences, both have the potential to be very attractive stocks at the right price (and especially if you pay attention to asset placement) provided they trade at the right price; eg, the PEG ratio adjusted to the dividend ratio. Personally, I have both of these companies at the time this article was published and I will be disappointed if USB starts following the same capital allocation practice as Berkshire because it does not have the same opportunity for it because of the prohibition in place for the bank's parent company.
In the end, the money you make from your shares comes to the hands of the total return component, including the profit and the capital dividend
Now that you've seen this, it's easy to understand that your wealth is built primarily from: <Increase in stock prices. In the long run, this is the result of a market that assesses an increase in profits as a result of expansion in the business or the repurchase of shares, which makes each share represent greater ownership in the business. In other words, if a business with a stock price of $ 10 grows 20% for 10 years through a combination of expansion and stock buyback, its value should be nearly $ 620 per share in a decade because of this power assuming Wall Street maintains the same price. -to-earning ratio.
Dividend. When earnings are paid to you in the form of dividends, you actually receive money via check by mail, direct deposit to an intermediary account, current account, or savings account, or in the form of additional shares reinvested on your behalf. Alternatively, you can donate, spend, or hoard this dividend in cash.
1. Sometimes, during a market bubble, you may have the opportunity to make a profit by selling to someone more than just a company. However, in the long run, investor profits cannot be separated from the fundamental benefits generated by the business operations he has.
2. To learn more about this topic, read
3. Ways You Actually Make Money Investing in Inventory
You might also want to check out my Investing in Stocks guide. Balance does not provide tax, investment or financial services and advice. This information is presented without considering the investment objectives, risk tolerance, or the financial condition of any particular investor and may not be suitable for all investors. Past performance does not show results in the future. Investments involve risks including possible loss of principals.
