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eventually cost nearly one million Reichsmarks. People had to cart around so much currency that, at times, they needed shopping-type carts to haul it! Ultimately, this inflationary burden was too much the German society, fuelling the
rise of the Nazi party and Adolf Hitler.
In just the past decade, a number of countries, especially many that made up the former U.S.S.R. and others such as Brazil and Lithuania, have gotten themselves into a hyperinflationary mess with inflation rates of several hundred percent per year. In the mid-1980s, Bolivia's yearly inflation rate exceeded 10,000 percent.
Governments often try to slap on price controls to prevent runaway inflation (Pierre Trudeau did this in Canada in the 1970s, as did Richard Nixon in the U.S.), but the underground economy, known as the black market, usually prevails.
If you don't continually invest in your education, you risk losing your competitive edge. Your skills and perspectives can become dated and obsolete. Although that doesn't mean you should work 80 hours a week and never do anything fun, it does mean that part of your "work" time should always involve updating and building on your skills. The best organizations are those that recognize the need for continual knowledge and invest in their workforce through training and career development. Just remember to look at your own career objectives, which may not be the same as your company's.
Returns: How Much Can \lou Make7
The money that you invest is commonly referred to as principal (this has nothing to do with the quality, principle, lacking in disreputable financial advisers who sell inferior investments because it brings them hefty commissions, which is spelled principle).
Part I: Investing Fundamentals
When you make investments, you have the potential to make money a variety of different ways. If you've ever had money in a bank account that pays interest, you know that the bank pays you a few percent in exchange for your allowing them to keep your money (which the bank turns around and lends to some other person or organization at a much higher rate of interest). The rate of interest is also known as the yield. So if a bank tells you that its savings account pays 3 percent interest, the bank may also say that it is yielding 3 percent. Banks usually quote interest rates or yields on an annual basis.
If a bank pays monthly interest, for example, the bank also likely quotes a compounded effective annual yield. If the bank pays you interest each month instead of once per year, when the first month's interest is credited to your account, that interest starts earning interest as well. So, the bank may say that the account pays 3 percent, which compounds to an effective annual yield of 3.04 percent.
When you lend your money directly to a company — which is what you do when you invest in a bond that a corporation issues — you also receive interest. Bonds as well as stocks (which are shares of ownership in a company) fluctuate in value once they are issued.
When you invest in a company's stock, you hope that the stock increases in value, that it appreciates. Of course, a stock can decline, or depreciate, in value. This change in market value is part of your return from a stock or bond investment:
Current investment value - Original investment
= Appreciation or depreciation
For example, if one year ago you invested $10,000 in a stock (you bought 1,000 shares at $10 per share) and the investment is now worth $11,000 (each share is worth $11), your investment's appreciation is
But stocks can also pay dividends, which are a bit like the interest you earn from a bank account. Dividends represent the company's way of sharing some of its profits with you as a stockholder. Some companies, particularly those that are small or growing rapidly, choose to reinvest all of their profits back into the company. (Of course, some companies don't turn a profit, so there's not much to pay out!) You need to factor these dividends into your return as well.
Chapter 2: Risks and Returns
Suppose in the previous example that, in addition to your stock appreciating $1,000 to $11,000, it also paid you a dividend of $100 ($1 per share). Here's how you calculate your total return:
Dividends + Current investment value - Original investment
--------------------------- = Total return
Or, to apply it to the example
Factoring in appreciation, dividends, interest, and so on, helps an investor calculate what her total return is. The total return figure tells you the grand total of what you made (or lost) on your investment.
Although you may be happy that your stock has given you an 11 percent return on your invested dollars, remember: Unless you held your investment in an RRSP or other tax-sheltered plan, you owe taxes on your return. Specifically, dividends and appreciation on investments that you sell are taxed.