Stocks and Capital Growth
What are stocks? Stocks are tiny shares in the profit potential of a company. Say there's a company that has issued a million shares of stock and you hold a thousand shares. That means you own one-thousandth of the company.
Suppose your company, let's call it Milco, makes a million dollars this year in profit. That means it has $1 in earnings per share. Earnings per share is abbreviated “EPS.” Suppose next year it earns $2 per share. That means its EPS doubled. What do you think — is that a good or a bad thing? Obviously, it's good. If your income doubled from one year to the next, you'd call that good. Same thing if it's a company.
But the funny thing about Milco is, they never send you a check. The year they made a dollar a share, they didn't send you anything. Then the next year they made $2 per share, still they didn't send anything. Why's that? Because Milco doesn't pay “dividends.” What do they do with the profits? Depends. If they're a good company, they reinvest it in their employees, their manufacturing facilities, and in paying down debt. It they're a bad company, they write big checks to their managers, and the company doesn't do so well next year.
Because most stocks don't pay dividends, we're mainly looking to make our money in stocks by selling them. That means that, as the companies grows its EPS, and other measures of value, it is perceived as being worth more, and people are willing to pay more for the shares of the company. That's called Capital Appreciation, and so hopefully, you buy a silly little company called International Business Machines, and ten years later you sell a computer behemoth known as IBM for a hundred times more than you paid for it.
Obviously, it takes smart people to grow a company like IBM, or Apple, or Microsoft. And once they get big like that — guess what? They stop growing at the same rate. Like children gain more height per year than a man in his twenties. So guess what else? If you want to see large capital appreciation in your stock holdings, you probably want to buy young companies that still have a lot of growing left to do. A company that is somewhat new in its field, for example. But companies like that often start fast and go bust. Their stock values may rise and fall quickly because they are vulnerable to market conditions like the price of raw materials, the entry of new competitors, and losses of key personnel or funding sources. This means they are volatile, and a bad choice for people who need to maintain liquidity. To learn more about these topic, read up on Volatility and Liquidity and Risk and Reward
Because capital appreciation can be a very elusive goal, and leads to all kinds of guessing about what company is going to improve its market profile, and how general economic trends are going to influence that outcome, a lot of people prefer to simply lend their money out at interest. That's the topic of our next section.
Go to>> Bonds and Interest Income
Suppose your company, let's call it Milco, makes a million dollars this year in profit. That means it has $1 in earnings per share. Earnings per share is abbreviated “EPS.” Suppose next year it earns $2 per share. That means its EPS doubled. What do you think — is that a good or a bad thing? Obviously, it's good. If your income doubled from one year to the next, you'd call that good. Same thing if it's a company.
But the funny thing about Milco is, they never send you a check. The year they made a dollar a share, they didn't send you anything. Then the next year they made $2 per share, still they didn't send anything. Why's that? Because Milco doesn't pay “dividends.” What do they do with the profits? Depends. If they're a good company, they reinvest it in their employees, their manufacturing facilities, and in paying down debt. It they're a bad company, they write big checks to their managers, and the company doesn't do so well next year.
Because most stocks don't pay dividends, we're mainly looking to make our money in stocks by selling them. That means that, as the companies grows its EPS, and other measures of value, it is perceived as being worth more, and people are willing to pay more for the shares of the company. That's called Capital Appreciation, and so hopefully, you buy a silly little company called International Business Machines, and ten years later you sell a computer behemoth known as IBM for a hundred times more than you paid for it.
Obviously, it takes smart people to grow a company like IBM, or Apple, or Microsoft. And once they get big like that — guess what? They stop growing at the same rate. Like children gain more height per year than a man in his twenties. So guess what else? If you want to see large capital appreciation in your stock holdings, you probably want to buy young companies that still have a lot of growing left to do. A company that is somewhat new in its field, for example. But companies like that often start fast and go bust. Their stock values may rise and fall quickly because they are vulnerable to market conditions like the price of raw materials, the entry of new competitors, and losses of key personnel or funding sources. This means they are volatile, and a bad choice for people who need to maintain liquidity. To learn more about these topic, read up on Volatility and Liquidity and Risk and Reward
Because capital appreciation can be a very elusive goal, and leads to all kinds of guessing about what company is going to improve its market profile, and how general economic trends are going to influence that outcome, a lot of people prefer to simply lend their money out at interest. That's the topic of our next section.
Go to>> Bonds and Interest Income