Last Tuesday we toured the stock exchange. I told you what is being negotiated there and I showed you some companies that you can buy. If you have not yet seen, just click below:
Today I will be more to the point and I will show you how to make money with actions. Already notice that this is not an investment recommendation on the company of the moment.
What I am going to show you today are two basic concepts you should know before navigating the world of stocks: dividends and speculation .
In other words: do you want to be a partner or a trader ?
Once you answer this question, you can set your goals and invest more peacefully.
For those who do not know where they are going, any way will do.
Share rate of return
This formula sums it all up: you can make money in two ways. For the dividends you receive and for the price you sell your stock. Let’s look at each of these two forms in detail.
Making Money # 1: Dividends
If you’ve read Part 6 of the series then you already know how this works. The concept is simple: if you own an action, you own the part of the firm. And if you own part of the firm, you deserve a share of the profit.
That part of the profit you get is what we call dividends .
Your piece of cake
Take, for example, the actions of one of the largest mining companies in the world: Vale. In 2015 the company distributed the following dividends to its shareholders:
- April 30: R $ 0.37 per share.
- October 30: R $ 0.60 per share.
So imagine that you bought a stock of Vale on January 5, 2015. Her price on that day was R $ 17.83 .
Thus, you spent $ 17.83 and became entitled to receive dividends. In 2015, it would have received R $ 0.37 + R $ 0.60 = R $ 0.97 .
Calculating the average rate of return for this investment, we have: 0.97 / 17.83 = 5.44% in one year.
That is, who bought vouchers that day, won back 5.44% of the amount invested in the year 2015. A little in April and a little in October.
“But 5.44% is too little! Did not fixed income pay 13% a year? “
The confusion is normal. But see, here we are looking at just the dividends. It’s just a part of your gain from the action. Nor did we look at the price of the stock, if it went up, if it came down …
But focusing on that part of the text in looking at just the dividends, think to myself how things evolve over time …
Continuing with Vale: suppose that, on average, the company will grow 3% per year.
This is a conservative projection given that the projected growth in the distribution of dividends in dollars over the last 17 years is 14% a year¹. Vale has been hit by ups and downs, a commodity boom in the past decade and falling Chinese demand in recent years. That is to say, it profited more in a few years, it profited less in others … However, looking at the long term, who invested in Vale in 1999 saw the company grow.
Look at the evolution of the dividend distribution of this company to its shareholders in billions of dollars:
The dotted straight line illustrates the upward trend
Simply put, imagine that the dividend you’ll earn will grow steadily at a rate of 3% a year.
In 2016: 0.97 + 3% from 0.97 = R $ 1.00
In 2017: 103% of 1.00 = R $ 1.03
In 2008: 1.03 x 1.03 = R $ 1.06
And so it goes … Follow the thought in the chart:
If the dividend grows, every year you earn a little bit more. 14 years later the dividends will have paid their initial investment of R $ 17.83.
20 years later, the dividends will be paying you 10% of the amount you invested, and growing. All this free of income tax .
And this is the life of the shareholder who thinks of dividends: he buys, sits, and waits for the money to come into the account. (Of course, always mindful of better opportunities coming along the way.) The important thing for this investor is not to follow the market all the time if the share price is going up or down 20 cents.
His investment has a more distant horizon: he is targeting in the long run. Daily variations do not bother you much. The idea here is to know if the company is making good investments that can increase its value , and to see these dividends increase over time.
That is, if you one day want to live on income, paying attention to good dividend payers is a fundamental attitude.
Risks of the Dividend Strategy
The company can go wrong, do unsuccessful projects, have fights or political influences misplaced in the management of the company, there may be corruption, there may be several factors in the company’s administration that will make it sink …
Finally, the company can do harm. If it starts to make a loss, you will not receive dividends, and if you want to get rid of your action, you certainly will not be the only one. You’ll try to sell your stock, but you’ll only be able to do it at a much lower price than what you bought.
That is, investing in stocks is an exercise in trying to predict the future. If you see that the company is well managed, has innovative projects, values efficiency, seems to be able to cut costs and increase revenues, then the future looks good, and you’ll probably earn good dividends.
Now if the management of the company is nebulous, if the investor’s information is bad, if the market of that company has a bad prospect for the future, if the major major shareholders are fighting or are putting the policy in front of the business, or if the company is simply being overtaken by more efficient competitors, beware! It may be time to re-evaluate your investments, sell your shares, and buy another company.
Are the partners fighting?
Important: DO NOT GET IT OUT!
This is a basic mistake, which I have seen thousands of times: the investor bought a stock 20 years ago, which was a marvel at the time! The company has already given you many joys and fat dividends.
The investor creates affection for that company. (Affect for an action ???? Believe it if you want).
Now times have changed and the company is starting to fall. Prospects for the coming years range from bad to worse. But he insists on thinking the market tooooodo – and surprisingly optimistic – decides to keep the action in the wallet waiting for better days.
Usiminas: classic example of a steel mill in a clear downward trend
With everything pointing against him, he still thinks “paper will come back”, and to make matters worse, he buys even more, arguing that “it’s cheap.”
When everything points out it can get cheaper still.
Remember that what is there is not just an action. It is, first of all, your money. And he has to be in the best possible place.
Anyway, “Take it, but do not cling . “
Making Money # 2: Valuing Your Stock
The other part is to gain from valuing the stock. This way of earning money does not exclude the other (dividends), but you can also only operate on that if you want.
The thought is simple: buy now and sell later. Buy cheap now to sell more expensive later.
The big question there is: how do you know if the action will go up or down ?
It is not my focus on this text to answer that question. My goal here is to show you that this is a possible way to make money, and that a lot of people do it.
Incidentally, it is possible to earn enough money from this, but you will have to invest time in learning about it.
Just to give you a taste, see, for example, this Folha de S. Paulo story (click here) that shows the performance of some actions from January to May last year. In just 5 months, you can see variations of more than 40% (for both high and low).
So, in the middle of the crisis, while some were losing, others made a lot of money.
Anyway, I’ll just give you an introduction on the subject, and show you that this learning, today, is based on 3 ways of analyzing the situation:
Types of stock analysis
Fundamental Analysis: It is the analysis that looks at the fair price of a company. This is seen by analyzing what the company spends, how it makes money, what its strategies, its investments, how its indebtedness is. It is the analysis that tries to understand the business in which the company is, including looking at the competition and the economic scenario. It is used to analyze longer scenarios, even if you are looking at the dividends.
Graphical Analysis: Do you know the graph I put up there? That cute graphic of Usiminas, all colorful, full of green and red bars. So the chart analyst looks at this. He does not want to know if the company sells shoes, beer, chickens or oil. He does not even have to know the name of the company. The purpose of graphical analysis is to look for patterns that can be repeated in that graph and to indicate the next movement of the action. He seeks out those designs to understand the movements of buyers and sellers. It is a widely used analysis for making short-term trades. Even if you want to buy and sell the same day! (What we call daytrade ).
Technical Analysis: Like graphic analysis, the technical analyst does not need to know what the company does. What matters to him is seeing the price movement. So, this analyst is, first and foremost, a statistician. He tries to use mathematical models, means, indices of force, to try to predict the next movements of prices. He analyzes the whole series of prices and, through the theory of probability, statistics or econometrics, comes to conclusions about the most probable movements of an action. It’s also a good way to see things in the short term.
Risks of speculation about the valuation of the share
Volatility is the word. Volatility is a measure of how things change. If a price varies a lot over time, we say that this thing is very volatile. If the price stays there, without many emotions, we say that the thing has low volatility.
The risk lives there. If you want to speculate about the price of a stock, prepare to have to deal with the volatility. It is not necessarily bad, it only increases your risk. That is: your chances of losing increase, but your chances of winning as well.
And this volatility is influenced by a number of factors: the country’s political climate, the price of international commodities (such as oil and iron), economic scenario, last-minute decisions made by the company, central bank decisions, disclosure of above or below results of expected, rumors, bubbles …
Thus, the investor operating in the short term should be more attentive to the news and have good sources of information.
But all this also depends on the technique used. As we saw earlier, graphical and technical analysis do not care much about this flow of news in your routine.
The point here is that the risks can be substantially greater, and the investor should be aware of some points:
- an initial strategy and respect it, not to be taken by the emotion of the moment
- be aware of opportunities and select good sources of information
- mistrust of miracle solutions
- invest what he knows he can lose
That is, do not apply the savings to your daughter’s university in a risky operation. As Grandma would say, do not put all the eggs in the same basket. Diversify your investments.
Leaving for practice!
“What a long post!” Yeah, and today I just told you some ways to make money from stocks. Next week there’s more, and now that you know better what stocks are for, I’ll finally show you how to buy one.