Is our business profitable for investors?
Let’s look at our lender, he gave a loan of $ 250, the business is profitable, we can pay him 10% a year, he is happy because he receives 10% of the return 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% received by the lender. Who had a better deal? Obviously, from an investor who bought 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 debt:
debt repaid first (= less risk and less income),
subordinated debt (= greater risk and greater income),
There are also various types of stocks:
An investor can take advantage of a residual claim, that is, claim assets or income after meeting other material needs of the company that are of a predominant nature, for example, after paying interest to lenders or owners of preferred shares.
The investor must assess the likelihood of permanent loss of capital. You can compare potential risks with alternative investment options: 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 will return your $ 1000, it is very safe. But the more risky the business, the higher the profit expectations.
There are different options for how to use the money that a company earns: you can reinvest them and expand your business in this way, you can pay dividends to yourself (plus that I get cash, minus – growth slows down, profits decrease). You can sell the company: the plus is, again, in cash, the minus is that you lose control and future profits. You can sell the company entirely or attract a private investor who buys a part of your business.
You can also make an initial public offering of your company. To enter the IPO, you need to provide a lot of information to attract investors. To evaluate a business, you need to compare it with its peers. The stock market is suitable for this – you can see how much McDonald’s or Coca-Cola shares stand.
The key point, if you want to become an investor, is that you have 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, by the end of it your initial $ 10,000 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. Adopt the words of Warren Buffet that rule number one for an investor is never to lose money. And the second rule is to never forget rule number 1.