IS OUR BUSINESS PROFITABLE TO AN INVESTOR?
Let’s look at our lender, he gave a loan of $ 250, the business is profitable, we can pay him 10% per year, he is happy because he gets 10% profit on invested capital. Let’s look at the investor who bought the shares: he received 100% of the return on invested capital, compared with only 10% that the lender received. Who had the best deal? Obviously, from the investor who bought the shares. Why is this so? Because the investor who bought the shares took more risks. The higher the risk, the higher the profit. Debt is a safer investment, there are different types of debts:
debt repaid first (= less risk and less income),
subordinated debt (= more risk and more income),
There are also various types of stocks:
An investor can take advantage of the residual requirement, that is, claim assets or income after satisfying other material needs of the company, which are predominant, for example, after paying interest to creditors or owners of preferred shares.
The investor must assess the likelihood of a permanent loss of capital. You can compare potential risks with alternative options for investing money: for example, you can buy government bonds, this is the least risky investment, 10-year bonds with a yield of 3% per year. You give the government $ 1000, get $ 30 a year, in ten years you’ll get your $ 1000 back, it’s very safe. But the more risky the business, the higher the profit expectations.
There are different options for how to use the money that the company makes: you can reinvest it and expand your business in this way, you can pay dividends to yourself (the plus is that I get cash, the minus is that growth slows down, profit decreases). You can sell a company: the plus is, again, in cash, the minus is that you lose control and future profit. You can sell the whole company or attract a private investor who will buy part of your business.
You can also conduct an initial public offering of your company. To get an IPO, you need to provide a lot of information to attract investors. To evaluate a business, you need to compare it with peers. The stock market is suitable for this – you can see how much McDonald’s or Coca-Cola shares cost.
The key point if you want to become an investor is that you need to make decisions as early as possible if you want your money to grow. For example, if you manage to get 20% per annum for a period of 43 years, then by the end of your initial $ 10 thousand will turn into $ 24.3 million. Albert Einstein said: “Compound interest is the most powerful force in the universe.”
One of the important tasks is to try to avoid losing money. Take on the words of Warren Buffett that rule No. 1 is for an investor to never lose money. And the second rule – never forget rule number 1