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Key drivers of stock returns

moomoo Courses ·  12/15/2021 14:53

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As we learned before, stocks have the highest historical returns among main financial assets.

But you may still wonder whether the stock return is reliable and sustainable.

"Can I continue to make money from the market in the future?"

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Unlike cryptocurrencies with wild fluctuations, stock investment is more reliable and sustainable. 

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Why?

Because investing in stocks is like growing fruit trees with the expectation of raking in profits. 

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Suppose you're planting an apple tree.

There is no doubt that growing fruit trees requires time, commitment, and money.

Where can you get enough start-up capital? 

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You can raise funds from investors interested in this apple business.

Each investor is a shareholder of the tree and owns a portion of shares.

Share represents a part of the ownership of the tree, which means that shareholders can be co-owners of apples in the future. 

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When you have enough money, you start to plant the apple tree and care it with efforts.

The growing process is like business operation. 

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To have ripe, juicy apples, you have to spend time and efforts in the early days. 

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A few years later, it grows into a big apple tree.

Every year during the harvest season, you will reap a certain number of apples.

These apples, the returns of investment, will be distributed to each shareholder of the tree. 

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In addition to apple trees, there are also various fruit trees in the orchard.

If a specific stock is viewed as a fruit tree, then the stock market is similar to an orchard. 

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The stock market is a place where stocks are issued, bought, and sold.

In the orchard, you can trade shares of fruit trees.

In the stock market, you can deal in shares of stocks. 

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We all enter the market for high returns.

But do you know how the profits are generated? 

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For an apple tree, there are two main ways to generate gains.

One is the fruit, and the other is the growth of the tree. 

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Similarly, stock returns also come from two aspects.

The "dividend" paid to investors, like the fruit. 

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And the "growth" in company value, like the growth of the tree. 

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That seeds grow to apple trees is a process under the law of nature.

Typically, in the early stages, it grows at a fast speed.

Like many successful startups, when their products are introduced to users in the beginning, the companies tend to experience an exponential growth. 

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At the stage of full maturity, the tree begins to bear fruits steadily.

It's common that many high-growth companies gradually slow down their growth after years of competition. 

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Normally, we can categorize companies into two types: growth company and mature company.

Investing in growth companies, you will receive a small number of dividends but can benefit from a robust growth in the future.

Investing in mature companies, you will have stable returns with relatively high dividends. 

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For example, $Tesla(TSLA.US)$, an electric carmaker, has never paid a dividend since its IPO in 2010, but it has posted robust sales growth.

In contrast, while $Coca-Cola(KO.US)$'s sales performance has been stagnated over the past 10 years, it continues to pay high dividends to its shareholders. 

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Why do so many investors love $Tesla(TSLA.US)$ stock?

Keep in mind, the return of growth is usually much more considerable than that of dividends.

This means that if you have bought shares of $Tesla(TSLA.US)$ and $Coca-Cola(KO.US)$ 10 years ago and held them until 2021, you could make more money from $Tesla(TSLA.US)$ investment. 

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To sum up, investing in stocks is like planting trees.

If you spend more time and effort, you are more likely to reap fruits.

In addition to time and effort, learning of methods and strategies is necessary.

The following chapters will focus on these aspects. 

For more investment knowledge and trends, welcome to Courses in the Community.

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Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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