03 July 2014

What Kind of Value Are You Looking For in Shares Investment?

Some of the investors might ask themselves a question, what is their purpose of investing in shares? Most of the people would focus on capital gain, which is the net gain after disposing off their shares investment within a period. The period could be short or long term, depending on their strategy.

Most of the time, people act on news; good news or bad news. The news lead to the emotional changes of most investors in the market. The more you focus on the market movement, the easier you will get affected by the market itself. So, most of the time, we should focus on the intrinsic value instead of the fluctuation of the market shares price. 

If you are short term trader, you would be focusing on short term investment or in another word to ride on the volatility of the market. If this is the case, it would be a zero sum game, where one side would suffer from the losses due to the difference of the buying and selling price they made. However, if you are a long term investor, there is another option for you to consider besides the capital appreciation, which is the dividend yield. 

Dividend yield is similar to the rental yield from the real estate market. It could be affected by several factors - company's dividend policy as well as the overall market. There is a sentence called - a bird in hand is worth two in the bush. Some investors would rather apply this so called "passive income" method by focusing on the dividend paid to them than focus on the price fluctuation. 

Based on research (which I could not remember the source), majority of the investment return of long term investors is actually from the reinvestment of the dividend that they received over the years. If you are short term investor who is solely focus on capital appreciation, then you might miss another alternative to accumulate your wealth through dividend reinvestment strategy. 

Of course, there are certain companies that might have zero dividend policy, where they would keep the excess cash for business expansion or other investment purpose (e.g. Berkshire Hathaway). It would silly if you just focus on either capital appreciation or dividend yield. In fact, I would suggest to keep these two purposes in your mind:
  • Dividend yield (to give you a stable income during market downtrend, although the dividend income might also be reduced due to market uncertainties)
  • Capital appreciation through increase of the intrinsic value. It could be due to the improvement in long term business prospects / good management team.

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