Читать книгу Millionaire Expat - Andrew Hallam - Страница 18

You might wonder how money grows in the stock market. Such profits derive from two sources: capital appreciation and dividends. Let me explain with a story.

Imagine you've started a business called Fifty Shades, designing and manufacturing sexy underwear for men and women. After signing seductive advertising deals with Madonna and Miley Cyrus, sales thrust upward across every female age demographic. But as the company's CEO, you recognize a problem. Fruit of the Loom is spanking you silly in sales to aging Baby Boomer males. Only one solution makes sense: Sign Sylvester Stallone to a multiyear television‐advertising contract. He could dance around a boxing ring, wearing Fifty Shades skivvies while pounding away at Siberian‐sized strawberries and apples.

Such advertising should increase sales, but then you'll need to meet the product demand. New factories will be required; new distribution networks will be needed. They won't be cheap. To make more money, you're going to need more money.

So you hire someone to approach the New York Stock Exchange, and before you know it, you have investors in your business. They buy parts of your business, also known as shares or stock. You're no longer the sole owner, but by selling part of your business to new stockholders, you're able to build a larger, more efficient underwear business with the shareholder proceeds.

Your company, though, is now public, meaning the share owners (should they choose) could sell their stakes in Fifty Shades to other willing buyers. When a publicly traded company has shares that trade on a stock market, the trading activity has a negligible effect on the business. So you're able to concentrate on creating the sexiest underwear in the business. The shareholders don't bother you, because generally, minority shareholders don't have any influence in a company's day‐to‐day operations.

Your underwear catches fire globally, which pleases shareholders. But they want more than a certificate from the New York Stock Exchange or their local brokerage firm proving they're partial owners of Fifty Shades. They want to share in the business profits. This makes sense because stockholders in a company are technically owners.

So the board of directors (who were voted into their positions by the shareholders) decides to give the owners an annual percentage of the profits, known as a dividend. This is how it works. Assume that Fifty Shades sells $1 million worth of garments each year. After paying taxes on the earnings, employee wages, and business costs, the company makes an annual profit of $100,000. So the company's board of directors decides to pay its shareholders $50,000 of that annual $100,000 profit and split it among the shareholders.

The remaining $50,000 profit would be reinvested back into the business—so the company can pay for bigger and better facilities, develop new products, increase advertising, and generate even higher profits.

Those reinvested profits make Fifty Shades even more profitable. As a result, the company doubles its profits to $200,000 the following year, and increases its dividend payout to shareholders.

This, of course, causes other potential investors to drool. They want to buy shares in this hot undergarment company. So now there are more people wanting to buy shares than there are people wanting to sell them. This creates a demand for the shares, causing the share price on the New York Stock Exchange to rise. The price of any asset, whether it's real estate, gold, oil, stock, or a bond, is entirely based on supply and demand. If there are more buyers than sellers, the price rises. If there are more sellers than buyers, the price falls.

Over time, Fifty Shades' share price fluctuates—sometimes climbing, sometimes falling, depending on investor sentiment. If news about the company arouses the public, demand for the shares increases. On other days, investors grow pessimistic, causing the share price to limp.

But your company continues to make more money over the years. And over the long term, when a company increases its profits, the stock price generally rises with it.

Shareholders are able to make money two different ways. They can realize a profit from dividends (cash payments given to shareholders usually four times each year), or they can wait until their stock price increases substantially on the stock market and choose to sell some or all of their shares.

Here's how an investor could hypothetically make 10 percent a year from owning shares in Fifty Shades:

Warren Buffett has his eye on your business, so he decides to invest $10,000 in the company's stock at $10 a share. After one year, if the share price rises to $10.50, this would amount to a 5 percent increase in the share price ($10.50 is 5 percent higher than the $10 that Mr. Buffett paid).

And if Mr. Buffett receives a $500 dividend, he earns an additional 5 percent because a $500 dividend is 5 percent of his initial $10,000 investment.

So if his shares gain 5 percent in value from the share price increase, and he makes an extra 5 percent from the dividend payment, then after one year Mr. Buffett would have earned 10 percent on his shares. Of course, only the 5 percent dividend payout would go into his pocket as a realized profit. The 5 percent “profit” from the price appreciation (as the stock rose in value) would be realized only if Mr. Buffett sold his Fifty Shades shares.

Warren Buffett, however, didn't become one of the world's richest men by trading shares that fluctuate in price. Studies have shown that, on average, people who trade stocks (buying and selling them) don't tend to make investment profits that are as high as those investors who do very little (if any) trading. What's more, to maximize profits, investors should reinvest dividends into new shares.

Doing so increases the number of shares you own. And the more shares you have, the greater the dividend income you'll receive. Joshua Kennon, a financial author at About.com (a division of the New York Times Company), calculated how valuable reinvested dividends are. He assumed an investor purchased $10,000 of Coca‐Cola stock in June 1962. If that person didn't reinvest the stock's dividends into additional Coca‐Cola shares, the initial $10,000 would have earned $136,270 in cash dividends by 2012 and the shares would be worth $503,103.

If the person had invested the cash dividends, however, the $10,000 would have grown to $1,750,000.⁶

Let's assume Mr. Buffett holds shares in Fifty Shades while reinvesting dividends. Some years, the share price rises. Other years, it falls. But the company keeps increasing its profits, so the share price increases over time. The annual dividends keep a smile on Buffett's face as he reinvests them in additional shares. His profits from the rising stock price coupled with dividends earn him an average return (let's assume) of 10 percent a year.