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Stock investing is one method of asset management that aims to generate profits by purchasing shares issued by companies and benefiting from increases in stock prices, dividends, and other returns.
When you purchase shares, you become a shareholder of the company. Depending on the company, shareholders may receive dividends and shareholder benefits, and if the stock price rises above the purchase price, they may be able to earn a capital gain by selling the shares.
On the other hand, stock prices fluctuate due to various factors, including not only a company’s performance but also economic conditions, interest rates, foreign exchange rates, news, and investor expectations. If you sell shares after the stock price has fallen below the purchase price, you may incur a loss of principal.
In addition, indicators such as PER, PBR, and ROE are often used when comparing stocks. These can be useful references for checking stock price levels, corporate profitability, and other factors.
This article organizes the basics of what stocks are, why stock prices move, dividends, PER, PBR, ROE, shareholder benefits, the differences between cash trading and margin trading, and NISA as a foundation for learning about asset management.
Note:
This article is a personal study note for learning about stock investing and asset management. It does not recommend investing in any particular company, stock, securities company, financial product, or the like. Stock prices, dividends, shareholder benefits, tax systems, the NISA system, trading conditions, and other matters may change. When actually investing, check the latest information published by the Financial Services Agency, Japan Exchange Group, individual companies, securities companies, and other relevant organizations.
- What Are Stocks?
- How Profits Are Generated from Stock Investing
- Why Do Stock Prices Move?
- What Are Capital Gains from Stock Price Increases?
- What Are Dividends?
- What Is Dividend Yield?
- What Is PER?
- What Is PBR?
- What Is ROE?
- Differences Between PER, PBR, and ROE
- What Are Shareholder Benefits?
- Dividends and Shareholder Benefits Are Different
- What Is Cash Trading?
- What Is Margin Trading?
- Differences Between Cash Trading and Margin Trading
- Margin Trading Has Greater Risk Than Cash Trading
- What Is NISA?
- What Is the Tsumitate Investment Quota?
- What Is the Growth Investment Quota?
- NISA Annual Investment Limits
- NISA Tax-Exempt Holding Limit
- What Happens to the NISA Limit When You Sell Stocks?
- NISA Does Not Mean You Cannot Lose Money
- Points to Note When Losses Occur in NISA
- Items to Check When Investing in Stocks
- Do Not Judge a Stock as “Cheap” Based Only on Its Stock Price
- High-Dividend Stocks Also Have Risks
- Stock Investing Also Has Risks
- Differences Between Stocks and Government Bonds
- Summary
- References
What Are Stocks?
Stocks are issued by corporations to raise the funds needed for their businesses.
When an investor purchases shares, the investor becomes a shareholder of that company.
Shareholders are investors in the company and have certain rights depending on the number of shares they hold and other factors.
Corporations issue shares to raise funds from investors and use those funds for capital investment, new product development, business expansion, and other purposes.
Example:
If a company’s stock price is ¥1,000 per share and you purchase 100 shares, the purchase amount is ¥100,000 in a simplified calculation.
If the stock price later rises to ¥1,200 per share and you sell all 100 shares, the sale amount will be ¥120,000.
If fees, taxes, and other costs are not taken into account, this results in a capital gain of ¥20,000.
How Profits Are Generated from Stock Investing
The main types of returns that can be obtained from stock investing include the following.
- Capital gains from increases in stock prices
- Dividends paid by companies
- Shareholder benefits offered by some companies
Profits obtained from increases in stock prices are sometimes called “capital gains.”
Profits obtained by holding assets, such as dividends, are sometimes called “income gains.”
Why Do Stock Prices Move?
Stock prices are determined by transactions between people who want to buy shares and people who want to sell them in the market.
If more people want to buy, stock prices tend to rise, while if more people want to sell, stock prices tend to fall.
However, there are many factors that influence why the number of people wanting to buy or sell increases.
- Company sales and profits
- Financial results
- Earnings forecasts
- New products and services
- Corporate acquisitions and business alliances
- Economic conditions
- Interest rates
- Foreign exchange rates
- Raw material prices
- Domestic and international politics and economics
- Disasters and accidents
- Investor expectations and concerns
Corporate Performance and Stock Prices
In general, when a company’s profits increase, more investors may expect future growth or higher dividends, which may cause the stock price to rise.
Conversely, when a company announces that it has fallen into a loss or that its business performance has deteriorated, its stock price may decline.
However, good business performance does not necessarily mean that the stock price will rise.
If the market had already expected even better performance, the stock price may fall even after the company announces good financial results.
Stock Prices Are Not Determined Only by Current Performance
In the stock market, stock prices reflect not only a company’s current performance but also expectations for future profits and growth.
Example:
Even if a company currently earns only a small profit, its stock price may be high if many investors believe that the company will grow significantly in the future.
Conversely, even if a company currently earns large profits, its stock price may fall if its profits are expected to decline in the future.
What Are Capital Gains from Stock Price Increases?
If you sell shares at a price higher than the price at which you purchased them, the difference becomes a capital gain.
Example:
If you purchase 100 shares at ¥500 per share, the purchase amount is ¥50,000.
If the stock price rises to ¥700 per share and you then sell 100 shares, the sale amount is ¥70,000.
If fees, taxes, and other costs are not taken into account, the capital gain is ¥20,000.
Conversely, if you sell after the stock price has fallen, a capital loss occurs.
What Are Dividends?
Dividends are distributions of a portion of a company’s profits and other funds to shareholders.
Companies that pay dividends allow shareholders to receive dividend payments according to the number of shares they hold.
Example:
If you own 100 shares of a company that pays an annual dividend of ¥50 per share, the annual dividend is ¥5,000 before tax.
Dividends Are Not Always Paid
Owning shares does not necessarily mean that you will receive dividends.
Some companies do not pay dividends.
In addition, even companies that have paid dividends in the past may reduce or suspend dividends depending on business performance, management policies, and other factors.
What Is Dividend Yield?
Dividend yield is an indicator used to see how much annual dividend can be received relative to the stock price.
Example:
If a stock is priced at ¥1,000 and the annual dividend is ¥50 per share, the dividend yield is 5%.
Companies with high dividend yields may appear attractive, but they cannot be evaluated based solely on dividend yield.
A dividend yield may appear high because the stock price has fallen significantly.
In addition, future dividend reductions or suspensions may reduce the dividends actually received.
What Is PER?
PER stands for Price Earnings Ratio and is called “株価収益率” in Japanese.
It is an indicator showing how many times the stock price is relative to earnings per share.
Calculation:
PER = Stock Price ÷ Earnings per Share (EPS)
Example:
If the stock price is ¥1,000 and earnings per share are ¥100, the PER is 10 times.
In general, a higher PER can be viewed as indicating that the stock price is valued more highly relative to earnings, while a lower PER can be viewed as indicating that the stock price is lower relative to earnings.
A Low PER Does Not Necessarily Mean a Stock Is Undervalued
A stock is not necessarily undervalued simply because its PER is low.
For companies whose profits are expected to decline in the future, the stock price may have fallen, resulting in a low PER.
In addition, typical PER levels differ by industry, so it is also important to compare a company’s PER with those of companies in the same industry and with its historical PER.
What Is PBR?
PBR stands for Price Book-value Ratio and is called “株価純資産倍率” in Japanese.
It is an indicator showing how many times the stock price is relative to book value per share.
Calculation:
PBR = Stock Price ÷ Book Value per Share (BPS)
Example:
If the stock price is ¥1,000 and book value per share is ¥500, the PBR is 2 times.
What Does a PBR of 1 Mean?
If the PBR is 1, the stock price and book value per share are at the same level.
A company with a PBR below 1 has a stock price below its book value per share.
However, a PBR below 1 does not necessarily mean that the stock is undervalued.
A low PBR may result from low expectations for future profitability or concerns about the value of the company’s assets.
What Is ROE?
ROE stands for Return on Equity and is an indicator of how efficiently a company generates profits using the capital entrusted to it by shareholders.
In Japanese, it is called “自己資本利益率” or “株主資本利益率.”
Basic Concept:
ROE = Net Income ÷ Shareholders’ Equity × 100
Example:
If shareholders’ equity is ¥10 billion and net income is ¥1 billion, the ROE is 10% in a simplified calculation.
A company with a high ROE can be viewed as efficiently generating profits using the capital provided by shareholders.
A Higher ROE Is Not Always Better
ROE is a useful indicator for evaluating a company’s profitability, but it cannot be judged based on the number alone.
If shareholders’ equity decreases, ROE will increase even if profits remain the same.
In addition, companies that increase their borrowings and have a lower proportion of shareholders’ equity may appear to have a high ROE.
Therefore, when looking at ROE, it is important to also check the company’s financial condition, equity ratio, and other factors.
Differences Between PER, PBR, and ROE
| Indicator | Main Focus | Basic Concept |
|---|---|---|
| PER | Relationship between earnings and stock price | How many times earnings the stock price represents |
| PBR | Relationship between book value and stock price | How many times book value per share the stock price represents |
| ROE | Profitability using capital | How much profit is generated from shareholders’ equity |
PER and PBR are indicators used to see the level of a company’s stock price relative to its earnings and book value.
ROE is an indicator used to see how efficiently a company converts capital into profits.
Because each indicator measures something different, it is important to check multiple indicators in combination rather than relying on only one.
What Are Shareholder Benefits?
Shareholder benefits are a system in which companies provide their own products, services, gift certificates, and other benefits to shareholders who meet certain conditions.
For companies that offer shareholder benefits, conditions for receiving them may include holding a certain number of shares or more on a specified record date.
Example:
Some companies may provide their own products, meal vouchers, shopping vouchers, discount coupons, and other benefits to shareholders who hold 100 shares or more.
Not All Companies Offer Shareholder Benefits
Shareholder benefits are voluntarily offered by companies, and not all listed companies provide them.
In addition, the contents of the benefits, the required number of shares, long-term holding requirements, and other conditions may change.
The shareholder benefit program itself may also be discontinued.
Dividends and Shareholder Benefits Are Different
Dividends and shareholder benefits may both be received by holding shares, but they are different.
| Item | Dividends | Shareholder Benefits |
|---|---|---|
| Content | Mainly cash | Products, services, discount coupons, etc. |
| Availability | Varies by company | Varies by company |
| Amount / Content | May change | May be changed or discontinued |
What Is Cash Trading?
Cash trading is a type of transaction in which you use your own funds to actually purchase shares.
Example:
Using ¥100,000 of your own funds to purchase ¥100,000 worth of shares is a basic example of cash trading.
The shares you purchase are held as your own assets.
If the stock price falls, the value of your holdings decreases, but with ordinary cash purchases, a decline in the stock price does not require you to deposit additional funds with the securities company.
If the stock price falls to ¥0, you may lose the money you invested.
What Is Margin Trading?
Margin trading is a type of transaction in which you deposit margin with a securities company and borrow funds or shares to trade.
In ordinary margin trading, you can use margin collateral to trade an amount up to approximately three times the amount of your margin.
Another major difference from cash trading is that margin trading allows you to use “short selling,” in which you borrow shares and sell them first.
Concept:
If you use ¥1 million in funds to trade approximately ¥3 million worth of shares, a 10% movement in the stock price could result in a profit or loss of approximately ¥300,000.
Because margin trading allows you to trade amounts larger than the funds you actually have, profits may be larger, but losses may also be larger.
Margin Trading Has Additional Costs
Because margin trading involves borrowing funds or shares, costs such as interest and stock borrowing fees may apply.
In addition, if fluctuations in stock prices worsen the condition of your margin collateral, you may be required to provide additional margin, or your position may be forcibly settled by the securities company.
Differences Between Cash Trading and Margin Trading
| Item | Cash Trading | Margin Trading |
|---|---|---|
| Funds Used | Basically your own funds | Funds or shares are borrowed based on margin collateral |
| Amount That Can Be Traded | Basically within the amount of funds you hold | May allow trading up to approximately three times the amount of margin |
| Short Selling | Basically unavailable | Short selling can be used |
| Interest / Stock Borrowing Fees | Normally none | May apply |
| Additional Margin | Normally none | May be required |
| Losses | Result from a decline in the value of purchased shares | Leverage may increase the size of losses |
Margin Trading Has Greater Risk Than Cash Trading
Because margin trading allows you to use leverage to trade amounts greater than your own funds, even small movements in stock prices may result in large profits or losses relative to your own funds.
In addition, with short selling, losses increase when the stock price rises.
Therefore, cash trading and margin trading differ not only in how shares are bought and sold, but also in the level of risk and the mechanisms involved.
What Is NISA?
NISA is a tax-advantaged system designed to support individual asset building.
Normally, taxes are imposed on capital gains, dividends, and other income earned from stocks and investment trusts, but when eligible products are purchased within a NISA account, profits earned under certain conditions are tax-exempt.
The current NISA system has a “Tsumitate Investment Quota” and a “Growth Investment Quota.”
What Is the Tsumitate Investment Quota?
The Tsumitate Investment Quota is an investment quota for certain investment trusts and other products suitable for long-term, regular, and diversified investment.
The annual investment limit is ¥1.2 million.
Individual stocks cannot be purchased under the Tsumitate Investment Quota.
What Is the Growth Investment Quota?
Under the Growth Investment Quota, listed stocks, investment trusts, and other products that meet certain conditions can be purchased.
The annual investment limit is ¥2.4 million.
Therefore, when purchasing individual Japanese stocks through NISA, the Growth Investment Quota is mainly used.
NISA Annual Investment Limits
| Investment Quota | Annual Investment Limit |
|---|---|
| Tsumitate Investment Quota | ¥1.2 million |
| Growth Investment Quota | ¥2.4 million |
| Total | Up to ¥3.6 million |
The Tsumitate Investment Quota and Growth Investment Quota can be used together, allowing investments of up to a total of ¥3.6 million per year.
NISA Tax-Exempt Holding Limit
NISA has a lifetime tax-exempt holding limit.
The combined tax-exempt holding limit for the Tsumitate Investment Quota and Growth Investment Quota is ¥18 million.
However, of this ¥18 million, the amount that can be used under the Growth Investment Quota is limited to a maximum of ¥12 million.
| Item | Limit |
|---|---|
| Total NISA Tax-Exempt Holding Limit | ¥18 million |
| Of Which: Growth Investment Quota | Up to ¥12 million |
What Happens to the NISA Limit When You Sell Stocks?
When you sell a product held in a NISA account, the amount of the tax-exempt holding limit equivalent to the acquisition cost of the product sold can be reused from the following year onward.
Example:
Suppose you purchase ¥1 million worth of shares through NISA and later sell them for ¥1.2 million.
The amount of the tax-exempt holding limit that can be reused is not the ¥1.2 million selling price, but the ¥1 million acquisition cost at the time of purchase.
However, the tax-exempt holding limit restored by the sale can only be used from the following year onward.
In addition, the restored tax-exempt holding limit is not added to the annual investment limit for that year.
NISA Does Not Mean You Cannot Lose Money
NISA is a system that makes profits from investments tax-exempt under certain conditions.
It is not a system that eliminates the risks of investing itself.
Example:
If you purchase ¥100,000 worth of shares in a NISA account and their value falls to ¥50,000 due to a decline in the stock price, the value of the assets will still be ¥50,000 even though NISA is being used.
Using NISA does not prevent stock prices from falling, nor does it guarantee the principal.
Points to Note When Losses Occur in NISA
Losses incurred in a NISA account cannot be offset against profits earned in taxable accounts.
While profits are tax-exempt under NISA, losses are treated differently from those in ordinary taxable accounts.
Items to Check When Investing in Stocks
When comparing stocks, it is important to check a company’s business performance, financial condition, and other factors rather than simply looking at whether its stock price is low or high.
- Stock price
- Sales
- Operating profit
- Net income
- Earnings per share (EPS)
- PER
- PBR
- ROE
- Equity ratio
- Dividends
- Dividend yield
- Dividend payout ratio
- Shareholder benefits
- Interest-bearing debt
- Future earnings forecasts
Do Not Judge a Stock as “Cheap” Based Only on Its Stock Price
When comparing a company with a stock price of ¥100 and a company with a stock price of ¥10,000, the company with the ¥100 stock price is not necessarily more undervalued.
The stock price itself is determined in relation to factors such as the number of shares issued, the company’s profits, and its net assets.
Therefore, it is not possible to determine whether a company is undervalued or overvalued based on the stock price alone.
Indicators such as PER and PBR are used to compare the stock price with a company’s profits and net assets.
High-Dividend Stocks Also Have Risks
Stocks with high dividend yields may appear attractive when considering dividend income from long-term holdings.
However, a high dividend does not necessarily mean that a stock is safe.
- Dividend reductions due to deteriorating business performance
- Suspension of dividends
- Declines in stock prices
- The yield may appear high because of a temporary special dividend
- The dividend yield may appear high because the stock price has fallen
When looking at dividend yield, it is necessary to check not only the amount of the dividend but also whether the company can continue paying it.
Stock Investing Also Has Risks
While stock investing offers the possibility of capital gains and dividends from corporate growth, it also involves various risks.
- Stock price fluctuation risk
- Deterioration in corporate performance
- Credit risk such as bankruptcy
- Risk of dividend reductions or suspensions
- Changes to or discontinuation of shareholder benefits
- Declines in the overall market
- Liquidity risk
- In margin trading, leverage may increase losses
Differences Between Stocks and Government Bonds
Stocks and government bonds are both used for asset management, but their mechanisms differ significantly.
| Item | Stocks | Government Bonds |
|---|---|---|
| Recipient of Funds | Companies | Government |
| Investor’s Position | Shareholder | Creditor |
| Main Returns | Capital gains and dividends | Interest, redemption gains, etc. |
| Maturity | Normally none | Yes |
| Price Fluctuations | Generally large | Varies depending on the type |
| Principal Guarantee | None | Treatment varies depending on the product and how it is held |
Summary
Stocks are issued by corporations to raise funds, and when you purchase shares, you become a shareholder of that company.
Stock investing may provide capital gains when the stock price rises above the purchase price, as well as dividends paid by companies.
On the other hand, stock prices fluctuate due to various factors, including corporate performance, economic conditions, interest rates, foreign exchange rates, and expectations for the future.
Indicators such as PER, PBR, and ROE are used when comparing stocks.
PER indicates the relationship between earnings and stock price, PBR indicates the relationship between net assets and stock price, and ROE indicates how efficiently a company converts capital into profits.
In addition, stock trading methods include cash trading and margin trading. Margin trading allows transactions exceeding your own funds by using margin collateral, but losses may also become larger.
By using NISA, profits earned from eligible stocks and investment trusts can be made tax-exempt under certain conditions.
However, NISA is not a system that prevents investment losses.
When investing in stocks, rather than looking only at a single figure such as “the stock price is low” or “the dividend yield is high,” it is important to consider a combination of factors such as the company’s profits, financial condition, stock valuation indicators, dividends, and future business environment.
References
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