What is accumulation?
- Investors: buy shares of stock in a company and hold those shares over an extended period of time, even if the price of the share goes up or down.
- Companies: investing the profits of their businesses back into their operations, instead of giving the profits to shareholders of the company.
Typically when you hear about people accumulating things, you may imagine your cousins collecting comic books, Beanie Babies or Pokémon cards. Collectors save up their treasures. They even buy more to increase the size of their collection. These hobbyists guard their group very seriously, and they continue to accumulate even if their hobby gets expensive. Over time, their collection grows and with it (hopefully) so does the value.
Accumulating shares is similar to gathering stuff for your collection. The significant differences lie in the time of accumulation and the end goal. For a hobby like collecting stamps, the amount of time you dedicate can be based on your desire to accumulate until you are tired of your stamp collection. Your goal is collecting stamps because you love them, and the goal could be to get a stamp from every state.
Most people do not “collect” stocks as a hobby, but instead, their goal is to accumulate a diversified portfolio to increase wealth and curb their risk.
Accumulating for investors
As an investor, you collect shares until you reach the set time and a set goal. For example, let us say that you are building a portfolio of stocks and ETFs for a specific purpose. That goal might be to save and invest as much money as possible before you enter college to help decrease your student loan debt. You still have five years before you graduate high school. That five years will be the set time you have to invest and is known as your time horizon.
Over the next five years, you set aside a few dollars to accumulate shares in your favorite company. You continue to purchase shares even if the prices change every time you buy. You refrain from selling your shares even if the company’s stock goes up or down since you still have five years before you graduate. You also reinvest any dividends the company issues so that you automatically accumulate more shares.
There are three primary methods on how you can accumulate:
- By buying shares consistently, no matter the price and time.
- By putting any dividends back to the company.
- Preferably, doing both!
Accumulating for companies
Individual investors are not the only ones who can collect stocks and assets; companies do this too!
If you own just one fractional share, you are still technically a part owner of that company. Many companies operate to distribute profits to the shareholders. Since you are a shareholder, you are entitled to the financial gains of a company depending on the number of shares that you own.
Dividends are earnings the company gives to shareholders. However, some companies do not give out the profits to their shareholders even if their business operations are profitable. Instead, the company decides that the gains will be invested back into the company for business operations, like opening another branch or making more products. Many technology companies use this method and rarely distribute dividends.
Investing profits back to their activities is how companies accumulate value. By using the financial gains to improve the business, companies will find reaching or even exceeding market expectations easier. Companies can also create better products or services and can acquire more customers. Better business operations often result in a better share price for a stock, but can potentially increase the risks.
The earlier you start to accumulate shares, the better chance you have to broaden your financial future. Investing any dividends back into the stock you own will help you gather wealth even faster. You can start by buying fractional shares and then storing them in your account. Warren Buffet began collecting stocks at 11, and he is now one of the wealthiest people in the world. He’s living proof that accumulating shares early is one of the smartest investing strategies.