How Much is the Interest Rate in Stock Market?

Chris asked me “Sir, how much interest po ba ang makukuha mo sa blue chips stocks?”

To give you a straight answer Chris, there is no permanent interest rate in stock market. If your savings account is earning 1% per year or your deposit account is earning 5% per year, in stock market, the “interest rate” is not predetermined. If in savings and deposit account you know what interest rate the bank is giving; in stock market you don’t know what “interest rate” the market will give to you.

Rate of Return

I know some of us mostly know the word interest rate while growing up. Well, if you happen to pick up a book or magazine discussing about investments then the word interest rate may already be obsolete to you because in the investment world and in particular the stock market, we call the interest rate the “Rate of Return”.

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Chris you need to familiarize yourself with this word “Rate of Return”. Instead of uttering interest rate, you can say rate of return.  Rate of return according to Investopedia is the gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains.

While we do not know what rate of return the stock market will give us, history tells us that the average return for the past 20 years is 14%. With regards to the future, nobody can predict how much will the returns be but the past can give us a glimpse on what the future returns will be.

Interest Rate in the form of Dividends and Capital Appreciation

If the stock market does not provide a fixed rate of return, then why do investors “risk” their money into it? Why don’t they just put it in Treasury bonds and T-bills? These instruments issued by the national government have a fixed rate and are relatively safe compared against the stock market?

You know in stock market, you can earn through capital appreciation and dividends. Mind you, these are not fixed returns.

Dividends

There are different types of dividends. We have cash dividends, stock dividends, and property dividends. The most common dividend being shelled out by companies to its shareholders is the cash dividend. There are companies who give annual dividends at 7-8% of your investment depending on the performance of the company. PLDT, Globe, ABS-CBN and GMA are part of the few companies that give high dividends to its shareholders. I have written an article before to show you a real example of cash dividend. Please check it here. http://theofwinvestor.blogspot.com/2011/12/real-example-of-cash-dividend.html

Capital Appreciation

Aside from dividends, as the company continues to grow and earn more profits, its stock price increases also. When the stock price increases, your rate of return increases. For example, you bought PLDT at 2,674 per share yesterday. If after a year, the price went to 3,000 per share then your investments have increased already by 12%. That is called capital appreciation. My friend told me that he somehow understood what capital appreciation is when he read my article on how the stock market works. Here you go. http://theofwinvestor.blogspot.com/2011/11/how-stock-market-works.html

In summary, the rate of return in stock market is not fixed unlike the interest rates in your savings account or deposit account. Since the interest rate is not fixed, the rate of return can go as high as the market wants and of course, it can go as low as the market wants also.