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. Let’s say you have built a business, but now you need some more money to expand or maybe you just want a private jet. Where do you get the money from? Here is an idea for you, why don’t you break down your company and sell part of it while you keep the majority to stay in charge. That’s what 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 38 dollars a share. Not bad, right? But, when he realized that there are so many more people who want a piece of his pie, he added another 84 million shares (421million). And guess what? He sold every single one of them and raised 16 billion dollars. He literally became a billionaire in just a few hours. In fact, the stock price increased to 45 dollars within the first day of trading. It seems like Facebook was doing great, but it was too early to celebrate because it felt back to 38 by the end of the day, and that was just the beginning. The bad news was just starting. In the next few weeks, the stock crashed to as low as 20 dollars. Twice smaller than its original price. Now, to understand what’s happening here, we have to get to the root of the stock market.
In the past stocks were acquired primarily for dividends. Theoretically, when you a buy a stock, you become the owner of that company. Which means that you like any other owner have the right to the profit of the company. Congratulations, you have purchased 10 Facebook stocks in January of 2017 and you are now the owner of Facebook exactly like Mark, and I am not kidding. So, Your company (Facebook) makes 15.934 Billion dollars.
How much of that belongs to you? At the end of the day, you have spent 1300 dollars to buy your 10 stock. (Facebook stock price in January 2017) But lets first take a look at how much stocks are there in total. It turns out that there are almost 3 billion of them (2.956 Billion). I doubt that your 10 stock matters now. But let’s be optimistic. Because, if we divide the net income on the numbers of shares, each stock should earn a little over 5 dollars (5.39= 15.934 Billion/2.956 Billion), by the way, that’s known as EPS (earnings per share). In other words, your 10 stock suppose to earn you almost 54 dollars (53.9). Not bad, right?. But that’s just hypothetically, in practice, you get absolutely nothing!
The board of directors is the one who is going to decided 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 stocks. But don’t worry, not everyone is a scammer like Mark Zuckerberg. For example, last year Apple paid 13 billion dollars in dividends (12.769 B) or 2.5 dollars for each stock (2.46). Of course, it’s not much for a stock that costs 170 bucks but something is always better than nothing. However, today, it doesn’t really matter how much the company pays as much as the price of the stock. Apple’s stockholders experienced a 33% gain within a single year! That’s way better than market’s average,( from $120 to $160). You probably have already heard that Apple is the first company to cross a trillion dollar, valuation because its stock price crossed 200 dollars. But what if I told you that until June of 2014, Apple stock price was 645 dollars. Does that mean, that the company was already valued at more than 3 trillion dollars? Oh, god, this stock market is so freaking complicated.
Let me explain. There is something called stock splits. Each stock was split into 7 pieces and the prices were decreases proportionally (92.7 dollars). Technically nothing really changed, but now more people can afford the stock and join the community of Apple investors. Since the stock now costs 92 dollars. But not all companies do that, some prefer to only work with serious people such as Warren Buffett. His company Berkshire Hathaway has never split their stocks, that’s why it only has 1.68 million shares in comparison Apple has 5 billion (4.91 Billion). That’s why a single buffet’s stock (Berkshire Hathaway) cost over 300K dollars. I guess most of us will never join buffets secret investors society.But don’t worry, Buffett wouldn’t mind taking your money as well. That’s why he created class B shares which are more affordable (200 USD). The topic of the stock market never ends.