Expert: Gina Boykin - 1/6/2009

Question
Dear Sir,

I would like to buy some of the 50 shares from ABC Company at $45 per share which will make it total of $2250

if the price goes up to $70/share in one day then i decide to sell it, I’ll make a profit of total $[3150-2250=900]
if the price comes down and if i sell it i will make loses, (which i don’t want)

NOTE: from above examples please tell me that if the company pays dividends how will I be paid and will it be over a year or what.

Does warren Buffett made his Current fortune by buy cheap and selling high?
if this is the case then what does he mean by sticking to a company like he did with COCA COLA, how some one get benefits by sticking to a company that will bring some good profits in future, is he profiting from Dividends paid by the company.

How is he making profits?
Did he ever invest in bonds or Mutual funds?

For example he is holding
American Express Co. (13.1%)
Anheuser-Busch Cos. (4.8%)

How is he paid from these companies?

I am 19 years old; I really want to know how to play the game of investment,

Please include an  examples in your reply.

Regards
Mansoor


Answer
Once you purchase a stock, there are ONLY two ways to make money from that purchase.  The first way is from selling the stock at a higher price and the second way is from dividends.

Each year, companies make net income and they basically have two options – reinvest that money in the business (to grow the business, pay down debt, purchase another business, or just save the money) or they can pay it out as dividends.  When a company uses the money to grow the business, it usually makes the stock price increase over time because the company expects to make more money in the future.  This means you’ll make your money later (maybe next year or years later).  When you buy stock in a company because they are strong and have the potential for earnings in the future that is a long-term strategy that many people use, including Warren Buffet.  His portfolio grows because stock prices for the companies he owns grow over time.  When his portfolio grows, his “net worth” grows, but he really only makes money on paper because you can’t get your money until the stock is sold.

If the company decides to reward its shareholders now instead of later, that is called paying dividends.  Dividends can be paid in cash or stock.  For example, if you have 100 shares of ABC stock that costs $20 you could receive 10 cents a share (a total of $10) or you could receive 1/2 share added to your account.  Investing in companies that pay dividends are good in flat or down markets.  For example, if you really believe that ABC is great company overall and will continue to make money and even grow over time, then even though the stock may be flat for the next year or so (or even go down), it may be a good time to buy, if ABC is paying good dividends.  So while the stock is doing nothing, you make a little money, and when it eventually goes back up, you make money.  

In your example, Coke is such a huge company that they aren’t going to really grow quickly.  However, they are most likely never going to go out of business, they reinvent new ways to make money by developing new products (e.g. bottled water has not been around very many years), and will always be one of the main players in the beverage industry.  So even if you think the stock may only go up by 5 or 10 percent over the next decade, it may be worth it just to get the dividends.