Investing My Money What Are Stocks?
Last week I talked about a form of online investment that promises high returns: peer-to-peer investment . Focused on the example of the “Biva” platform, we saw the opportunities and risks of this type of application. If you did not see it, take a look here:
Today I will stop talking about Fixed Income and start a new part of this series: let’s talk about Variable Income .
That is, finally let’s talk about actions !!!
But first of all, it is important to understand the trail that we have traced here. The whole series is motivated by a very practical problem:
You have money and you want to know the best place to put it.
And I’m here to help you on this quest. To understand the whole environment in which we are working, I strongly recommend that you read the first chapters of the series, especially the first chapter:
I started with Fixed Income on purpose. It is more accessible and less risky than Variable Income, and for these and others, it is always recommended that most of your investments be in Fixed Income.
Nonetheless, Variable Income has no frightening effect, and anyone can quietly understand the concepts I will explain here.
Once again, let’s stop coaxing and let’s go!
What is Variable Income?
These are investments whose remuneration can not be measured at the time of application
Examples of investments in Variable Income: Shares, Derivatives (options, futures market contracts), Gold, Currency (dollar, euro), Multimarket Investment Fund Quotas, Real Estate Investment Fund Quotas (FII), …
That is, imagine the time when you applied your money by buying an action.
At this point, you can not predict tomorrow. Your stock may go up and you get rich, it may grow slowly, it may stay the same, or it may even plummet and you lose everything. That is, the value of your investment can vary at all times. That’s why the name is Variable Income.
Remember the Fixed Income? There you knew everything that was going to happen. Did you know if your application would be corrected for inflation, at the Selic rate, or if it would have a flat rate. Not here. That’s the difference for Variable Income.
The comparison, then, is also obvious: Variable Income is often more risky than Fixed Income.
So why would anyone invest in it?
- There is only one reason to accept taking more risks: the hope that incomes will be greater.
- It’s a different investment. The objectives of investing in variable income may differ from investing in fixed income.
How different? What does this Variable Income have to be so special about? That’s what we’ll start to see in this sequence of posts.
Over there I gave you several examples of investments in Variable Income. Today, though, let’s focus on the actions , and let the rest go forward.
But to understand what an action is, before you need to understand the following:
What is a company?
It is the union of people, materials and any other productive factors in order to produce a good or provide a service.
You and I want to sell lemonade. I’m great at squeezing lemons, and you’re great at selling: if we get together we’ll probably make a great team, much better than if we were apart! Let’s be partners !!!
Okay, what do we need? Lemons, knife, a squeezer, a tent, a jar, glasses, change to leave in the box …
Let’s say all this costs about $ 1,000. Okay. Let’s split this up halfway there. And as “the combo is not expensive”, we will soon combine how to split the profits: half for me, half for you, okay? OK.
Ready! We have a company! Note:
- Investment : R $ 500 + working time
- Return : Uncertain. Will it be a success? Or will we lose the $ 500?
Let’s be partners?
You had a great time !! Make a company that teaches programming to people over the internet or by cell phone. You even understand a little of the subject and have good contacts, but Carol …
Carol is a genius! Carol knows all the programming languages in the world, and she learns to teach. You gave her the idea and look at it! She not only loved it as another friend (named Dani) called it.
We have a company composed of 3 members : You, Carol and Dani.
The three of you met and decided: we are going to work three hours a day on this project and make the best website in the world, and we will charge x reais for each one who takes the course. As you gave the idea and some good contacts, decided to make the following division: 40% of the profits go to you, 30% to Carol and 30% to Dani.
Unlike lemonades, you do not need anything to start with: only your minds, your knowledge, and your computers.
Ready! We have a company! (Another start-up technology to revolutionize the world!)
- Investment : 6 hours of work per day and electricity
- Return : If it does not work, you will have wasted time and opportunities. If it works, you can make good money.
Ready, it’s defined what a company is. Now it’s easy to answer the next question:
What are actions?
Shares are shares of a company.
Quotas = pieces = parts = slices.
That simple. Okay, the mystery is over. From largest to smallest company. An action is this.
Actions = “a lot of bright letters on LED panels”
In the example of lemonade , we have a society of two people: me and you. We founded the company putting R $ 1,000, and we call it the company’s social capital . If the company has only two actions, there we have it: one action is mine and one action is yours.
Imagine that now I want to sell my part in the company. That’s right, I want to sell my stock. Our company only has a month and is doing very well, everybody likes it. Result: I found a person who wants to buy this action for $ 700.
I made a good deal! I invested R $ 500, I sold the stock at R $ 700: profit of R $ 200! That is, return from $ 200 ÷ $ 500 = 0.4 = 40% in a month!
And my action now has a price in the market: worth $ 700. And this can vary over time. If the company thrives, it can increase. If the thing starts to go wrong, this value may decrease.
In example 2 of the technology company, imagine that we have 10 shares. So, 4 will be yours, 3 are from Carol and 3 are from Dani.
Look at the obvious thing again: each one receives according to the amount of actions he has. In order for you to receive 40% of the profit, you must have 40% of the stock. Simple, right?
If you had 1% of the shares … you would get 1% of the profit. And so it goes.
But back to the example, your company is a success !!! People are learning to program multiple languages everywhere. The price is attractive and your service is great, congratulations!
This whole success makes it appear that the company will continue to grow ! It’s going to take off! And that attracts a lot of people who want to invest in you. People who not only want to lend money to your company … They want more. They want to grow along with you: they want to become partners.
The proposal is: a big investor wants to put $ 1 million in the company. You then decided a new organization in this society. It is divided into 100 shares:
- You: 30 shares
- Carol: 25 shares
- Dani: 25 shares
- Big Investor: 20 shares
So you have offered 20% of the company to this great investor at a price of R $ 1 million. And he accepted! That is, if 20% (one fifth) of the company is worth $ 1 million, how much is 100% of the company (the entire company)?
It makes sense to think that it now costs $ 5 million. And so, it also makes sense to think that each share is worth R $ 50,000 (because 1% of R $ 5 million = R $ 50,000).
You started the company from scratch. Now you have equity in stock that is equivalent to R $ 1.5 million today! (For 30 shares x R $ 50,000 = 1,500,000).
The investor: Fixed Income x Variable Income
Here’s another simple and very important difference. Imagine this great investor who wants to put $ 1 million in this company. There are two possible situations:
- He lends money to the company: that is, he invests in a debenture (a Fixed Income bond) and becomes a lender of the company.
- He buys shares of the company: that is, he invests in stocks (a variable income securities) and becomes a shareholder of the company.
So, which is better? Be a creditor or shareholder? Again, it depends. It depends on the remuneration, expectations for the future, and the comfort of both the company and the shareholder.
Despite my totally inconclusive answer to that point, the important thing to know here is: there are two ways to support a company.
And that’s it! Now you know what actions are
But wait there! I know this was very little and you want to know more. But let’s break it down. Next week I’ll tell you about the companies that are on the stock exchange: they are the Corporations (or SA) .
Today we saw the thing from the point of view of someone who founded a company. Next Tuesday, we will look at the situation from the point of view of an investor who, looking at a company, decides to invest in it, becoming a partner.
I’ll show you a little about the actions of the stock companies, and about two ways to make money from it. (Which, after all, is what we all want to know).