The Ocean of Stocks
To make a long story short - the stock market is a simple and effective way to preserve and grow your money. There is no other instrument that will allow you to increase your capital on such a consistent and regular basis. I would probably compare it to an ocean full of fish and other seafood. But like the ocean - which can feed you, your whole family and all the coastal communities - it also requires very strict rules and discipline in how it's used. You can catch small fish in coastal waters for years, you can set your nets and take your catch steadily. But the ocean is also a home to creatures of all sizes, including predators that you want to avoid at all costs. And if there is a storm, you are more likely to stay at home than go out on the open sea in a small boat in the hope of finding a bigger fish.
By following some basic safety guidelines, the ocean can provide for you and your family for many years to come. But if you ignore those rules and safety measures, you'll quickly find yourself in over your head and potentially lose everything you've worked so hard for.
Investing in Stocks and Bonds
Alright, enough of analogies, let's get straight to the details. Basically, there are two main things you can invest in: shares and bonds (well, there are a lot more, but we will take it one step at a time).
Shares, also known as stocks or equities, give you a slice of ownership in a company. The more shares you own, the bigger piece of the pie you get. If you own 100% of the shares, congrats - you're the boss! But if you only own, say, 50% of the shares, you can't make all the decisions by yourself. You'll need to get the agreement of the other 50% owners first.
Now, let's talk about bonds. These are a type of investment where you're actually lending money to a company or government. We'll dive deeper into this in some upcoming posts, so stay tuned! But for now, let's get back to the exciting world of shares in the stock market.
The Stock Market as a Marketplace
Let's picture a bustling fish market where fishermen who have just caught fresh fish are meeting with buyers who want to buy them. Similarly, the stock market is a marketplace where owners or co-owners of big companies who are looking to sell their shares meet buyers who would like to buy them.
Prices in the stock market are affected by the laws of supply and demand, just like in our local fish market. For example, if everyone is craving sardines, and it's wintertime when they're scarce, the price will likely go up. But in June, when they're plentiful, the price will likely go down.
Now, picture a huge marketplace with millions of participants setting prices for their shares in companies. Once the buyer and seller agree on a price, the deal goes through. But unlike buying a fish at the market, buying a share in a company can potentially provide you with a steady stream of income in the form of dividends and the chance for the share price to increase in the future.
So, when you invest in shares of a good company, you're not just getting a one-time meal like you would with a fish. Instead, you're investing in a long-term opportunity to potentially earn income for as long as you hold on to those shares.
Example: LVMH Holding
Let's take the well-known example of Tesla shares. However, it's probably a little banal. Let's take a better example of a European company - LVMH Holding (full name LVMH Moët Hennessy - Louis Vuitton, Société Européenne) - one of Europe's largest public companies, its portfolio includes around 75 of well-known brands of luxury goods and alcohol
At the end of 2022, its market capitalization - the value of all its shares - was estimated at 348 billion euros. Where does this figure come from? The company has issued around 502 million shares. At the end of 2022, the price per one share was €694. So, that gives us – 502 million shares times €694 per share – €348 billions.
According to their annual report in 2021, the company made a net profit of €12 billion. In 2022 even more – €14 billion. Basically, it makes more than a 1.1 billion euros in net profit every month. And anyone can buy its shares and become a co-owner of LVMH.
Is one share enough to have a say in the company's management? Of course not, but it's enough to make the money you invest in LVMH work for you and make you a profit. When the company has made money, it can decide to pay out some of that profit to its owners - this is called a dividend. In 2022, the company paid €12 per share in dividends.
Moreover, if the company grows, shareholders have the can expect their shares to increase in value too. LVMH's business is growing at ~20% a year, and so is the value of its shares. As more and more people want to buy its shares, the price at which they wish to buy them will rise. So, an LVMH shareholder, like any other business owner, benefits from having his money invested in a growing and profitable company.
The more shares we buy, the bigger our stake in the company. And the more income we receive if the company is successful. Unfortunately, the opposite is also true - if a company is not making a profit or is not being run efficiently, its share price will fall as more and more people are prepared to sell their shares and put their money into more promising companies.
So, how do you tell which stocks will go up and which won't? Which companies will be profitable and which won't? This is the subject of many academic papers and thousands of books. And how many lives have been broken in heated debates, how many fortunes have been ruined trying to guess the next best bet.
In fact, there are no secrets, but there are some basic rules, which we will discuss in the next articles.