Tuesday, 5 January 2016

EXAMPLE 1.0

BASIC EXAMPLES OF HOW A SHARE CAN MOVE #1

Example a fictional company called “ABC” is valued at $10,000,000 (10 mil) and issues 1,000,000 shares at $10 each  that means that if you buy 1 share you own one millionth of the company if you were to buy 10000 shares you would effectively own 1% of the company

Some companies will pay a dividend which is a distribution of profits sometimes payed out to shareholders yearly or more often half yearly. Other companies might not pay out a dividend and choose to re-invest any profits into the company.

lets say ABC does pay out a half yearly dividend to its share holders of $0.40 per share (which is a fairly healthy payout rate) you would get two payments per year equivalent to this so if you owned one share you would get 2 x payments $0.40 or if you owned 10000 shares you would get $4000 twice a year, a total yield of 8% per year

Lets say another fictional company XYZ is valued at a similar amount ($10mil) and floats 500000 shares at $20  each  but lets say each $20 share pays a dividend of $0.60 a share - still a reasonable payout,yielding 6% per year but not as good as ABC.

Based on these facts alone ABC holds a more attractive dividend yield than XYZ  and on the surface would appear to be a more attractive option for investors.

Common sense would say that more people would be interested in buying “ABC” and the rules of supply and demand would take over and push the price of ABC upwards…. lets say over the course of the year it might go to $12 per share, which in the real world would not be out of the question. This equates to a 20% increase on the share price. Its market capitalization would now be $12mil

Would XYZ go up or down? Hard to say. 6% is still a good yearly yield and in market conditions of late will still return more than putting the same amount of money in the bank … real estate hasn’t done much over the last few years so where else are you going to put your hard earned money? XYZ while not as brilliant an investment as ABC is still better than many other options out there so maybe there is still a demand for it?? It might go to $22.00 per share over the course of the same year. This would equate to a 10 percent increase in the share price. Its market capitalization would now be $11mil

So which is the right choice? Well both shares did alright really, they both returned better than any other common investment (bank deposits and most real estate) and realistically any money you make is good, but ABC was definitely the BETTER choice.

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