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Why do investors buy shares? Dividend income and capital growth are the two major reasons, but to get the full picture, you also need to factor in diversification, inflation, and also your emotions. Imagine you've chosen to invest a thousand euros into natural power partners. A Dutch energy company, NPP is profitable, but the shareholders aren't.

Some want the company to give all its profits and dividends while others want the company to retain all its profits. These two groups have different investment objectives. Investors who prefer the cash now are called income investors or value investors. They want a steady flow of dividends. Cash in their pocket is more important than a promise of cash in the future.

The second group, our growth in. That perspective is different. They hope to get a capital gain for holding their shares for a long time. Their incentive is the possibility of a large lump sum in the future value companies are chosen because they normally make a dividend payment to shareholders once or twice a year.

You may remember that we looked at dividends in the first equities. It can be hard for a value company to grow. Its products may be mature. Think how few of us really need another microwave or its income may be regulated by law, such as a water supplier, which cannot raise prices above a certain level, because most of its profits have been paid out as dividends.

There's little money to develop new products or open up new markets. Investors are happy though. Instead of capital gains, they'll get a stream of dividends by the way, we'll explain dividend yield in a later module where you'll learn how to calculate dividend yield and identify high yielding companies.

It's important to remember that no dividend payment is guaranteed and the company won't pay anything. If profits suddenly. Warren buffet whose personal wealth was $67 billion. At the end of 2015 has done pretty well out of value investing. He buys shares that have the potential to pay dividends over the very long term as he puts it.

Our favorite holding period is forever. He's holding company barks. Hathaway is a portfolio of simple to understand businesses that produce a steady stream of cash. A great example was Gillette. It's a product that has a relatively low production cost, but that charges a premium for its brand. Therefore, those profits get paid out in dividends to shareholder.

Companies grow because they have a fantastic new product or because they're better than their competitors. The early years of fast-growth companies are often difficult. So much money is spent on developing technology and opening new markets that they can make losses. And loss-making companies never paid dividends.

However, once their products become popular, sales will increase and profits will grow. The directors of a growth company, use this money to build new factories, conquer overseas markets and buy up competitors. The money is plowed back into growing the company rather than pay down to investors as dividends.

Google first sold shares to the general public in August, 2004. Each share cost $85 in the year since then the company now known as alphabet, Inc has never paid a single cent in dividends. Are the investors upset? No, the return that's come via. Capital gain has been amazing since 2004 shares in the company have soared by 1500%.

Google is the most visited website in the world. It's made more than 180 acquisitions buying up huge brands like YouTube and has invested continually in R and D. The profit Google makes is reinvested into the company. Its success is seen in the massive rise in the share price. Diversification is an essential part of stock investing, spreading your investment across different companies, sectors and countries automatically improves the relationship between risk and return.

In a simplistic example, let's consider oil. If the price of oil falls, your shares in oil companies will probably be. But those companies that use a lot of oil airlines, electricity producers, heavy manufacturers will benefit from reduced costs. Their shares should rise, but in the long-term concentrating on one company or even one sector can be a dangerous strategy.

A mixed portfolio will reduce the risk of putting all your faith in a single. We encourage you to spread your risk across different sectors and geographic markets later on, we'll teach you how a balanced portfolio of well chosen equities forms. The basis of sensible personal investments. Inflation reduces your effective investment returns.

Let's see this in action with two different investments, a government bond, and a share in the same country. And let's assume for our example, that this country currently has inflation at 3%. The average rate of return quoted is the nominal rate. This is sometimes referred to as the headline rate, but the real rate of return is the nominal rate, less inflation.

And it's the real rate of return that is of most importance as you seek to grow your funds. The government bond pays investors 4% nominal. That sounds good for a risk-free investment, but with inflation running at 3%, the real return is only 1%. The share gives on average, a nominal rate of return of 8%.

Again, inflation takes 3% of this, which leaves a real rate of return of just 5%. Inflation takes a bigger chunk of return from a low yielding investment than it does for higher yielding possibilities. You can appreciate why investors seek investments with higher returns. During times of high inflation shares are popular, even if they are more volatile.

They're higher nominal returns mean that inflation eats up less of the money you make. Some people choose steady income over capital gain others aim for potentially large gains instead of regular flows of money. Why? Well, there are many complex reasons, but let's look at a couple of simple examples.

People who choose income shares could be older investors and therefore less inclined towards. For example, pensioners or those heading towards retirement who were largely reliant on their savings might need investments that produce income. No one likes to lose money, but retired people are especially vulnerable to losing their capital.

They need investments that produce enough money for them to live well. And therefore preserving capital is more important than the chance of making gains. On the other hand, investors who buy shares for capital gains are normally more comfortable with risk. They know that to capture the upside, they have to be able to cope with volatility and short-term losses.

It's clear that there are multiple reasons that shape people's investment decisions, and these examples only scratch the surface. So what about you? What are your reasons for investors? Before you start selecting companies be clear why you're investing, what are you investing for? There's a huge difference between trying to make a short-term profit to pay for your immediate financial requirements and investing for your children's education.

Clearly, these are very broad examples and not intended to shape your investment strategy, but they highlight the need for you to really consider your investment strategy. And what you're investing for dividend income and capital growth are the two major reasons investors buy shares. These two groups have different investment objectives.

Investors who prefer the cash now are called income investors or value investors. They want a steady flow of dividends. The second group are growth investors. Their perspective is different. They hope to get a capital gain for holding their shares for a long time, value companies are chosen because they normally make a dividend payment to shareholders once or twice a year.

It can be hard for a value company to grow as its products may be mature and most of its profits have been paid out as dividends with growth companies, money is often spent on developing technology and opening new market. So they can make losses. However, once profits are made, the money is plowed back into growing the company rather than pay doubt to investors.

As dividends. Diversification is an essential part of stock investing, spreading your investment across different companies, sectors and countries automatically improves the relationship between risk and return. The average rate of return quoted is the nominal. This is sometimes referred to as the headline rate, but the real rate of return is the nominal rate, less inflation.

Before you start consider your reasons for investing, what are your timeframes, your goals, and your appetite to risk.