As an investment, shares have 3 characteristics:
1. They are relatively illiquid.
2. The return is uncertain.
3. A large part of the return is in the form of capital gains.
Even the most inexperienced investor is aware of the last characteristic.
Question: We should buy shares in accordance with their expected dividend yield (DY). "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"
Question: "Why should the price of a share, any share for that matter, go up in the first place?"
Here are some reasons for share not to go up:
Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.
There is only one good reason why a share's price should go up in the first place:
If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share
- now pays a higher dividend than before or
- has the prospect of paying a higher dividend.
- That is, the intrinsic value tends to be a constant multiple (i.e. so many times) of the dividend.
- "How many times?" - this is a very complex subject which will be looked at later.
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