When you think of investing, the first thing that comes into mind is this complicated world of the stock market. With so many charts and numbers, it’s easy to get confused, so let’s break it down and try to make a sense out of it.
Suppose you have built a business, but now you need some more money to expand or maybe you just want a private jet. Where will you get money? Here’s an idea for you, why don’t you break up your company and sell the majority of it, while you remain in the majority. This is what the stock market is for, and this process is known as Initial Public Offering (IPO), but how much money can you make? Let’s take an example of Mark Zuckerberg’s little toy – Facebook. It went public in 2012 with 337 million shares at a price of $ 387 per share. Not bad, is it ?! But, when he realized that, there are too many people who want a piece of his pie, he added another 84 million shares (421 million). Guess what else? He sold every one of them. And raised 16 billion dollars. He literally became a billionaire within a few hours. In fact, the stock price rose to $ 45 within the first day of trading. Facebook seems to be doing very well, but it was too early to celebrate as it was back to 38 by the end of the day, and that was just the beginning. The bad news was just starting.
Explanation of Profit & Losses:
Over the next few weeks, the stock plummeted to $ 20. Twice its original price. Now, to understand what is happening here, we have to go to the root of the stock market. In the past, the shares were acquired primarily for dividends. Theoretically, when you buy a share, you become the owner of that company. Which means you like any other boss. The company has the right to profit. Congratulations, you bought 10 Facebook stocks in January of 2017, and now you own Facebook, similar to Mark, and I’m joking. So, your company (Facebook) makes 15.934 billion dollars, how much of it is yours ?! At the end of the day, you have spent $ 1300 to buy 10 of your shares. (Facebook stock price in January 2017) But first notice how many stocks are there. It is learned that there are about 3 billion (2.956 billion) of them. I doubt your 10 stocks matter anymore. But let’s be optimistic. Because, if we divide the net income over the number of shares, each share should earn a little over $ 5 (5.39 = 15.934 billion / 2.956 billion), which is known as EPS (earnings per share). goes. In other words, your 10 stock takes you around $ 54 (53.9) to earn. Not bad, is it? But this is just imaginary, in practice, you get absolutely nothing!
Is there Anything Complicated? :
The board of directors is the one who decides what to do with this money. And their first priority is to fill their pockets and expand the company, so no one really cares about your 10 shares. But don’t worry, not everyone is a scammer like Mark Zuckerberg. For example, last year Apple paid $ 13 billion in dividends (12.769 B), or $ 2.5 for each stock (2.46). Of course, this is not much for a stock that costs Rs 170, but something is always better than nothing. However, today, it does not really matter how much the company pays the price of the stock. Apple shareholders experienced 33% profit within a year! This is better than the market average. ($ 120 to $ 160) You’ve probably already heard that Apple is the first company to cross a trillion dollar valuation because its share price has crossed $ 200. But what if I told you that as of June 2014, Apple stock was priced at $ 645. Does this mean that the company was already worth more than $ 3 trillion? Gosh, this stock market is very complicated.
Explanation About Stocks:
Let me explain There is something called stock splits. Each stock was divided into 7 pieces, and prices decreased proportionately ($ 92.7). Technically nothing has really changed, but now more people can afford the stock and join the community of Apple investors. Since the stock now costs $ 92. But not all companies do this, some prefer to work only with serious people like Warren Buffett. His company Berkshire Hathaway has never divested its stock. This is why it has only 1.68 million shares, compared to Apple having 5 billion (4.91 billion). That’s why a single buffet stock (Berkshire Hathaway) is worth over $ 300K. I think most of us will never join the Buffets secret investors society. But don’t worry, Buffett won’t even take your money. This is why they created Class B shares which are more affordable (200usd). The stock market theme never ends, but as usual this video, hit the subscribe button and the bell next to it. Thanks for reading and I’ll see you in the next one.