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A. A stock that costs ten dollars and has a potential to go to twenty dollars over the next three months but gives no dividends.
B. A stock that costs fifteen dollars and is expected to reach seventeen dollars over the next three months but gives around seven percent dividends per year based on company profitability.
Please mention which option (A or B) and why.
Most of the answers and reasons are the same, a profit motive investor will go for option "A" and that is suitable for me also as change is constant.
Definitely option A. Having 100% gain in a quarter is always better than a small percentage of dividend which comes around yearly and that too if profits occur.
Why with option B answer ? it is more profitability with continuity for long term ..... I choose option B ... I am sorry my friends ....
As a long term investor, potential of increase in price needs to be captured carefully. Unless the potential is true, we should remain away from such stocks. But if there is such potential, yes, some of the investment can be earmarked for it with stop loss limits in ON condition.
For, long term perspective a good healthy investment option is desirable when compared with the stocks having very high level of volatility in their prices.
option A my choice
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1. Option "A" involves a speculation which is out of my control (market going up over the next 3 months) than option "B" and as an investor I don't base my investment decisions on speculations even if those speculations are positive. There is a difference between an investor mentality and a trader mentality. Not saying one is better than the other, just saying they are different. A trader buys low hoping the price will go up so he/she can sell high. Big part of this methodology is out of the trader's hand or control. If the market goes down within the next three month (which happened zillion times before and will happen zillion times again), what do I end up with? A bunch of stocks which are not giving me any cashflow and which are holding up my capital. I have been put in this situation before and it's not a nice one.
2. If I choose option "B" however, I have a much less risk. Regardless of the market price of the stock, I make money from holding it. As long as I don't sell it, I'm a winner. If the price of the stock goes down and I don't want to sell it, will I still get my annual dividends on it? Yes, of course. Stock dividends are not related to the stock price. Stock dividends are related to the company performance and profitability which I need to research before I buy the stock. How many times did the "Apple" stock go down when Apple's sales were booming? More times than i can recall. Did the dividends given on apple stocks get affected each time the apple stock price go down? Never happened. Why? Because the dividends are related to the company profitability not it's stock market share price.
3. What about the 7% profit rate expected to be given as a dividend end of the year? Is this a good return on the investment or a bad one? Here, I'll quote one of the most successful investors in Canada and North America, Kevin O'Leary, the tycoon of "Shark Tanks" reality program. He says during an interview that "any investment in paper asset that brings 4-6% as a rate of return is something that he would like to have about 30% of in his investment portfolio". Hence 7% is not a bad figure.
Seems like a simple IRR problem. Considering Par value as 10$ -
Option A - IRR will be 26% . Cash Outflow in period 0 is -15. Cash inflow in period 1, 2 & 3 is 0, 0 & 20 respectively. Hence IRR of 26%.
Option B - IRR will be 4.63%. Cash outflow in period 0 is -17. Cash inflow in period 1, 2 & 3 is 0.058, 0.058 & 17.058. Hence IRR of 4.63%.
I would choose option A based on above.
I am go with stock B because this stock provide dividends then also save future results and expenses on this stock.
I am for - Option "B" - As an example : I am a shareholder of a prosperous bank. As the bank is profitable, the price of my shares goes up with a very low percentage, but I am receiving dividends from the bank twice per year based on the bank profitability, which is for millions.
Option "A" makes me only curious about the nature of the stock that brings 100 percent net profit for a very short term ? :)))) I think that it is in the area of our imaginations only !!!
And something more - to has a potential , does not mean that it will be happen.
The life teaches us to ask for less and get more. Have a nice day all of you !
I agree with experts answers about the option"A".
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