When you think of investing the first thing that comes into mind is this complicated world of the stock market with so many charts and number. It’s easy to get confused. So let’s break it down and try to make a sense out of it. Let’s say you have built a business, but now you need some more money to expand or maybe you just want a private jet. Where do you get the money from? Here is an idea for you. Why don’t you break down your company and sell part of it while you keep the majority to stay in charge? That’s what stock market is for and this process is known as initial public offering. But how much money can you actually raise?
Let’s take an example of Mark Zuckerberg little toy, Facebook. It went public in 2012 with 337 million shares at the price of $38 a share. Not bad, right? But when he realized that there are so many more people who wants a piece of this pie, he added another 84 million share. Guess what? He sold every single one of them and raised $16 billion. He literally became a billionaire in just a few hour.
In fact, the stock price increased to $45 within the first day of trading. But it was too early to celebrate because it felt back to $38 by the end of the day. And that was just the begining. The bad news were just starting. In the next few weeks, the stock price crashed was low as $20, twice smaller than its original price. Now in order to understand what’s happening here, we have to get to the roots of the stock market.
In the past, stocks were quite primarily for dividends, when you buy a stock, you become the owner of that company, which means that you like any other owners have the right to the profit of the company. Congratulations, you have purchased ten Facebook stocks in January of 2000, now you are the owner of Facebook exactly like Mark and I am not kidding here try not to laugh. Your company makes $16 billion. How much of that belongs to you? At the end of the day, you have spent $1,300 to buy your ten stocks. But let’s first take a look at how much stocks are there in total.
It turns out that there are almost 3 billion of them. I doubt that your ten stocks matters now, but let’s be optimistic because if we divide the net income on the number of shares, stocks should earn you a little over $5, by the way, that’s known as EPS. In other words, your ten stocks are supposed to earn your $54, not bad, right? But that’s just hypothetically, in practice, you get absolutely nothing.
The board of directors is the ones who are going to decide what to do with this money, their first priority is to fill their pockets and expand the company. So no one really cares about your ten stocks, but don’t worry, not everyone is this comer like Mark Zuckerberg. For example, last year Apple paid $13 billion in dividends or $2.5 for each stock. Of course, it’s not much for the stock that cost $170, but something is always better than nothing.
However, today it doesn’t really matters how much the company pays as much as the price of the stock itself. Apple stockholders experienced a 33% gain within a single year, that’s way better than markets average. You probably have heard that Apple is the first company to cross $1 trillion valuation because its stock price cross $200. But what if I told you that until the June of 2014, Apple stock price was $645. Does that mean that the company was already valued at more than $3 trillion?
The stock market is so freaking complicated. Let’s explain. There is something called stock splits. Each stock was split into 7 pieces and the prices were decreased proportionly. Technically nothing really changed, but now more people can afford the stock and join the community of Apple investors. Since the stock now cost only $92.
But not all companies do that. Some prefer to only work with serious people such as Warren Buffett. His company, Berkshire Hathaway has never split their stock. That’s why it only has 1.7 million shares, in comparison, Apple has five billion. That’s why a single Buffett stock costs over $300,000. I guess most of us will never join Buffett secret investors society. But don’t worry, Buffett wouldn’t mind taking your money as well. That’s why he created class B shares which are more affordable.
Topic of the stock market never ends.