Reinvestment is the reuse of profits to increase profits in the future.
Reinvestment of profits is used by many companies. For example, take the corporation that is building a gas pipeline. When the construction is completed, the company will receive the funds promised by the customer. Part of the money will be used to pay employees' salaries, marketing and other expenses. At the end, there'll be net profit.
The company may pay this profit or part of it as dividends to investors or spend on project development (reinvest): to expand production, buy modern equipment, etc.
To determine how much profit is spent on development, there is used the reinvestment coefficient.
Reinvestment coefficient is an indicator that allows to specify the share of profit returned to the project. A coefficient of 100% means that all profit is involved in the reinvestment process. At 0%-coefficient, all profit is spent on dividend payments. The company must ensure that the profit is spent evenly between the reinvestment and the dividend payout.
Companies reuse profit to ensure financial stability in the future. But we also make profit and can spend it on running costs or reinvest in financial instruments: stocks, bank deposits and shares in promising start-ups.
What should we know before reinvesting?
Investors who re-invest the profit are constantly faced with simple and complex interest rates. Let's find out what these terms mean.
Simple interest is a scheme in which the profit on deposits is accrued only on the initial amount.
For example, you deposited $1,000 at 5% per annum. Under the scheme of simple interest, every year, you will receive the same amount of $50. Over time, it will not increase and will not make your initial deposit more. So, simple interest deposits can compensate for inflation, but are not suitable for reinvestment of profits./p>
Compound interest is a scheme in which interest is credited to the initial amount and all profits made.
The scheme of compound interest allows to calculate the income of the next period not from $1000, but already from $1050. In other words, in another year you will get $52,5 instead of $50.
Methods of profit reinvestment
In order to reinvest profit, you should know the features of basic financial instruments: bank deposits, stocks, real estate operations, etc. Let's talk more about each of the instruments.
Bank deposits
To reinvest profits with the help of the bank, you need deposits with capitalization. They use the compound interest scheme we talked about above.
In deposits with capitalization, the bank does not transfer the accrued interest to a separate account, but adds it to the initial amount of the deposit. Due to this, in the next period, the rate will be valid for the increased amount.
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When choosing a deposit, consider the frequency of capitalization. It can be annual, quarterly, monthly and daily. For example, with a monthly capitalization, interest will be accrued every 30 days. So, the total amount of the deposit will increase every month and with it — the accrued interest.
Don't forget that your profits will rival inflation. The inflation rate in Russia in December 2019 was 3.35%. So, choose a deposit with a higher rate. For example, Sberbank offers deposits with capitalization up to 5.85%. This rate will cover inflation and allow to increase the initial deposit with further capitalization.
Remember! It is not an obligation to reinvest profits in new financial instruments. If you are confident in your bank, continue to capitalize your funds in it. Or divide the profit from the first period between reliable instruments and more risky ones.
Reinvestment in stocks
Shares are securities that are released by companies to attract investments. The share gives the investor the right to own shares of the company, as well as the right to receive part of the profit in the form of dividends.
Let us suppose you already own shares and want to reinvest your profits. You have two options:
- ReInvest dividends from shares. You receive dividends for your shareholding and can spend them to receive new shares. By increasing the number of shares, you will receive more dividends in the future.
- Reinvest profit from the sale of shares. Suppose, you bought 20 shares at $100. A year later, they rose in price to $200. You can resell them and buy shares of other growing companies.
The first variant operates on a scheme of compound interest. For dividends from your shares, you buy new securities, add them to the old ones and increase the dividend amount. Such a transaction can be carried out an unlimited number of times.
Some joint-stock companies are automating the process of reinvestment of profit interest. In the USA, this service is called the Dividend Reinvestment Plan. With it, companies automatically exchange dividends for new shares.
You can't buy shares yourself. To do this, you should contact a broker who takes a small percentage for his services. According to the dividend reinvestment plan, you do not have to pay commission to the broker.
Please bear in mind that shares under the reinvestment plan are acquired regardless of the market situation and even during the crisis.
Reinvestment in real estate
You can also reinvest your profits in real estate. This method has several directions.
Resale of real estate. With free funds you can buy the property and resell it at a higher price. The profit from the resale will depend on the initial price of the property. The lower the price at the beginning is, the higher the profit after the transaction will be. This is why, experienced investors buy homes at the beginning of the construction phase, when the price has not risen yet.
This method has a major flaw. When you buy a property at the beginning of the construction, you take a great risk. In fact, instead of buying a house, you get an agreement with the developer that your money will be used to build an apartment or a house. If the developer does not meet their obligations, you may lose your money.
When the construction is finished, you can resell the apartment at market price. The resulting profit can be used to make a similar transaction with more expensive real estate objects and with a higher resale income.
Increase in the cost of rent. Let's say, you rent an apartment and get a monthly income. You can use this income to increase the rental cost in the future.
For example, put aside a small amount from each rent to repair your property. Replace plumbing, windows and household appliances. Do not plan capital changes that will pay off for too long.
You can also include the costs of cleaning services in the rental price. Additional facilities for tenants will attract new landlords and allow you to increase your rental price.
Start-ups
Use free profit to diversify your investments. This will allow you to generate income regardless of the market situation, currency exchange rate or success of a particular company. For example, reinvest income from bank deposits into start-ups.
For investors, SkyWay offers a great financial perspective in case of its project's successful implementation. The project is developing above-ground unmanned electric vehicles on high-strength string rails. Such vehicles do not stand in traffic jams, do not harm the environment and can move at speeds up to 500 km/h. Today, SkyWay is developing in Belarus and in the Arab Emirates.
The project has already been supported by hundreds of thousands of investors from 200 countries. In case of commercial realization of the SkyWay transport infrastructure in other countries, investors will be able to make profit in the form of dividends. One can invest in the project by one-time payment from $50 or by installments from $250 for 10 months.
SkyWay also offers beneficial reinvestment conditions for its partner program participants.
You can sign the partnership agreement and become a member of the SWC partner program. Interest from attracted investments will be credited to your bonus account. You can reinvest funds from the bonus account into shares of the company with a higher discount than that of ordinary investors.
A few more ideas for reinvestment
Do not be in a hurry bringing your first dividends to the bank or buying shares. Try to reinvest the funds in education or health.
Education
Your qualificationis the same asset as shares or deposit in a bank. But if the bank goes bankrupt, you can still make money with a good education.
In order to understand how the exchange works and to find the most profitable stocks, invest in financial education. Spend part of your profits on an online course for new investors or enroll in a Master's degree with an economic profile.
Or invest in education to change the profession to a more profitable one. According to the company HeadHunter, software developers based on the operating system iOS earn the most — $3,800 per month before taxes.
If you don't want to change a job, become a professional in your current position. For example, learn a foreign language. This will help you work with customers from other countries and read untranslated books.
Health
The quality of your health depends on your life expectancy. So, spend your free money to get your body in order.
Start treatment before complications. It is better to give a small amount now than to pay for expensive treatment later. Imagine how much you would pay for a tooth filling and how much the denture would cost.
If you're healthy now, start eating properly and going to the gym. It will increase your strength during the day and enhance your performance.
What should be remembered about reinvesting?
- Reinvestment is the reuse of profits for increasing profits in the future.
- If you are afraid of risks, reinvest in financial instruments which you have already worked with and which have brought you profit.
- Select bank deposits with capitalization to increase the principal deposit and increase the profit from the interest rate.
- Spend free profits on startup shares to diversify your investments and generate income regardless of the market situation.
- Reinvest in health or education. Such assets will not disappear anywhere and will allow you to make money even in times of crisis.
Nikita Zybin