Money in the bank looks exactly like money hidden somewhere in your house – think banknotes and coins. You can lend your money to someone else for a fee, called Interest is how much it costs to borrow money. You can either earn interest when you lend money to somebody else or pay interest when you borrow money. Interest is the reason why debt is expensive. In addition the money you borrowed, you have to pay back an additional fee in exchange for using money that you didn't have. These More. You know how much interest you’ll earn, because you agree on a rate when you save your money. There are no surprises when you take your money out. A stack of banknotes doesn’t get smaller over time, but the stack of things you can buy does. If the interest you earn is less than inflation, you are getting poorer.
Investments don’t behave like savings, because money you put into an In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. 'Saving' is not the same More stops being money. When you exchange notes and coins for an asset, you’ve invested. An asset is something you own that can earn you money. Assets can be physical, like owning a franchise. You also get paper An asset is something you own that will earn you money in the future. In the real world assets are your brain, buildings and businesses. In the world of finance, assets are shares, bonds, cash, gold and other financial instruments and investments. Different types of assets (different asset classes) behave differently in different market conditions. This is discussed in more, like a share in a huge company.
Investing in the stock market is a way of turning your cash into paper assets called shares. You make money holding a share in one of two ways. This week we explain the first way, namely When a listed company shares profits with its shareholders, the cash amount paid to the shareholder account is called a dividend. It's usually expressed as cents per share or, in the case of ETFs, cents per unit. The more shares or ETF units you have, the more dividends you receive. These posts discuss dividends in more detail: OUTstanding money: Dividends More. Next week we’ll delve into selling an asset for a profit.
Sharing the loot
As we explain here, When a company or product is listed, you can buy and sell its shares on a stock exchange like the JSE. Listing on a stock exchange makes it possible for members of the public to invest in a company using the infrastructure provided by the exchange and its brokers instead of going directly to the company to buy shares. These More companies are just small businesses that got big. The owner of a small business gets to decide what the business should do every day and keeps all the profit the business makes. When you buy a share, you literally become one of the owners of the company. As one of the owners, you are entitled to be involved in the management of the company* and a share of the profit the company makes.
When your company makes a profit, the management decides on the best use of the profit. Sometimes all the profit gets paid to shareholders. Other times some of the profit is used to grow the business while the rest is paid to shareholders. Companies aren’t required by law to share profits with investors at all, but if a company doesn’t make or share profit and also doesn’t grow, investors will sell their shares in the company.
The part of the profit you receive as a shareholder is called a dividend. Each share gets the same dividend amount, so the more shares you have, the more dividends you get. The dividend amount is determined by the management of the company. Although it’s expressed as cents per share, the dividend amount isn’t related to the share price.
What does a dividend look like?
You might think a dividend is one of those “paper assets” we were talking about before, but they’re not. Dividends get paid into your share account in cash. You can either withdraw the dividends and spend that money or turn that money into assets again. It’s generally a great idea to use your dividends to buy more shares that can earn more dividends that can buy more shares…
Using your dividends to buy more shares is how share investments compound over time.
Beware the tax man
You pay a 20% tax on dividends that in most cases gets deducted before the dividend is paid to you. This amount seems like very little if you’re just starting out, but as your In the world of finance, a "portfolio" is a term to describe all the assets you own. It includes shares, cash, bonds, physical property, your retirement savings, your tax-free savings and any other financial instruments you might hold. It excludes insurance products like life insurance. Your overall portfolio can be made up of a number of portfolios held at different More grows this will become an important consideration.
*You might be excited by the idea of getting involved in the management of the companies you love, but listed companies typically have thousands of shareholders. For that reason, each share entitles the shareholder to a vote.
Being outstanding with your money doesn’t have to be hard. This series of articles will give you all the tools you need to get your house in order to start investing. Written by Just One Lap and sponsored by OUTvest, this series is the ultimate guide to outstanding money.