Imagine I have a million dollars. So let us imagine that I invest it very wisely on the stock market. So I’m really really good. In time (let’s say 10 years from now), my stocks are valued at $43 million. Ok, great. Now what?
What exactly can I do with this money? See it always makes me think when people say “I made a killing on the stock market”. What actually happens to thier bank balance?
In this instance I know that I could sell my prized stock and make a fortune. But let’s say I don’t. What happens? How exactly am I a rich man?
If this is real estate we’re talking about, I could understand. My total assets there would be the value of my estate, plus any revenue I could generate through leasing/renting etc.
But how does the same apply for stocks? I know through shares that you can get (if sufficient shares are brought) dividends, but does the value of the shares themselves make you rich?
I mean in my hypothetical example above, isn’t my fortune really just on paper? And if so, what good does it do me?
Buy buying stocks, you become the co-owner of a company. So, yes, you richer, like you would be if you had bought real estate. Of course, the value of your stocks can fluctuate, but it would be the same if you had bought instead, say, a little grocery…
The stock is an asset that you can use to determine your net worth. Strictly speaking, it does you no good as far as making you rich until you cash out and sell your shares.* Cash is also an asset which goes into that calculation. It’s been awhie since I’ve filled out a net-worth form but I believe that stock goes into short-term (if there is such a thing) as the fluctuations of the price are
Strictly speaking though, yes your profits are on paper and they don’t do you much good as far as trying to buy a car or anything. Yes, the value of the shares makes you rich, buy low, sell high and all that.
That said, you can gain beneficial accredited investor status which is depenent on your net worth and allows you to get involved in investment vehicles that you would otherwise not have access to. You are also likely to get dividends from some of the stocks that are in your portfolio, which can either be paid in cash or reinvested in additional shares of the company.
You are not rich, but potentially rich. If the stock crashes tomorrow, you’re back where you started from or worse. However, you may be able to assign all or part of your portfolio as collateral to secure other forms of cash and credit to use for investment purposes. In short, if your “financed” investment falls through, or the stock falls below an agreed upon level, the lender has the right to sell that stock in order to recover its investment.
The amount of money you are able to secure is dependent on a variety of factors. A “rich” diversified portfolio is much more valuable than a “rich” non-diversified one. So, the best thing to do if you find yourself potentially rich from one stock is to sell some of it off and diversify into other stable areas.
Ditto for any other asset other than cash or its equivalent. His $43M in stocks are an asset that need to be converted into cash before he can get a cup of coffee. Ditto for gold, though you may find a coffee shop that takes gold, they might take a few shares of Disney as well. He is rich, and if he were smart, he’d diversify.
Imagine I have a million dollars. So let us imagine that I put it in a bank account. OK, great. Now what?
What exactly can I do with this money? See it always makes me think when people say “I have a lot of money in the bank”. What actually happens to thier wallet?
In this instance I know that I could withdraw my money and have a fortune. But let’s say I don’t. What happens? How exactly am I a rich man?
If this is stocks we’re talking about, I could understand. My total assets there would be the value of the company and its estimated future earnings, plus any dividends I received, etc.
But how does the same apply for a bank account? I know through interest bearing accounts that you can get (if sufficient money is deposited) interest on the money in the account, but does the value of the account itself make you rich?
I mean in my hypothetical example above, isn’t my fortune really just on paper? And if so, what good does it do me?
Seriously, I don’t see how this is any different. Depositing in a bank is an investment just like the stock market. Stocks are very easily convertible. You’d probably have a much harder time walking into a bank and getting $1 million cash, even if you had many times that much on deposit, than you would getting $1 million credited to you bank account following a stock sale. In Israel, in fact, when you deposit money in the bank, you are legally buying shares in the bank. The only difference is that the bank is much less likely to go under (and remember, only a tiny fraction of your $1 million is federally insured) than the stock market is to crash, but then, you also won’t makle a killing in passbook account. (You’ll loose money, in fact, unless the interest exceeds the inflation rate!)
Imagine I have a million dollars. So let us imagine that I stuff it under my matress. Ok, great. Now what?
What exactly can I do with this money? See it always makes me think when people say “I have a bunch of cash stuffed under my matress”. What actually happens to thier house, car, etc.?
In this instance I know that I could spend my prized cash and get lots of nice stuff. But let’s say I don’t. What happens? How exactly am I a rich man?
You see, there are a lot of ways of measuring worth…
You’re going to have to do a better job making your point, because it is not discernable from what you’ve written.
A share is a statement of ownership of a fraction of a company. As long as the company is making money and paying dividends, the share has real value. The price of the stock may rise and fall, but that only indirectly affects the value, in terms of the discounted stream of income, of the stock.
The stock is something that people want to buy and sell, just like gold, cars, and homes. Because of that, if one has millions in stocks, one is rich. If one chooses to live in a plywood shack, that’s one’s own choice.
If you are dealing with a financial institution, and you say you have all of your money in stocks, they will evaluate the “quality” of your holdings. If you own blue chips (i.e. Dow stocks), they will consider your holdings as “quality”, or as valid collateral. If you own pink sheet stocks, they won’t credit you a penny on a dollar for them.