Money begets money
It takes money to make money. The old adage is right “money begets money”. You must have observed that the rich are becoming richer and the poor remain poor. This market is such that more money you pump in, more money you can take out from it. The banks, the financial institutions, the venture capitalists, they all want to give money to those who have it. Only large projects launched by large companies get big loans and that too on best terms. Does a bank give loan to a start up? No, he has to borrow private money at very high cost, the bank will come to him after he has been established, and he has continuous profitability.
Now let us take an example where this fundamental can be proved. Two persons say X and Y invest their money in stock markets. Mr. X is a small retail investor and Mr. Y is a high net worth individual who invests huge amounts of money in stock markets. Now Mr. X buys 200 shares of a stock at a price of Rs. 500 per share, making a total investment of Rs. 1,00,000. Mr. Y buys ten lots of 200 shares each at different prices with an average price of Rs. 485 per share, making a total investment of Rs. 10,00,000. After some days the price of the stock falls to Rs. 450. Mr. X, a small investor panics and, thinking that his small portfolio may not come down further, sells his shares and books a loss of Rs. 10000. whereas Mr. Y having a strong financial backup takes a different view and buys 10 lots of 200 shares more at different prices till the stock falls to Rs. 420 averaging his total price to Rs. 445. After some days the stock being oversold bounces back and retraces to Rs. 470. Mr. Y now sells his whole lot of 2000 shares at a profit of Rs. 25 per share. Here since Mr. Y had the backup of money he could translate his loss into profit. In another scenario if the stock price after being bought by Mr. X and Mr. Y runs to Rs. 550 and they both sell their lot at this price, Mr. Y still makes a profit 10 times higher than Mr. X as the money invested was ten times higher. Thus in both the cases, one who puts in more money makes more money. More you invest; more secure is your return. Further, consider yet another person Mr. Z, having much more money than Mr. Y. Mr. Z might be able to influence the price of the stock, in case he buys or sells very huge quantity of that stock, thus he is in a still better position to make money than Mr. Y or Mr. X.
Now let us examine another situation. Mr. A and Mr. B start a new business of supply of office stationery. Mr. A invests a capital of Rs. 10,00,000 and Mr. B also having a capital of Rs. 10,00,000 takes a bank loan of an equivalent amount and invests Rs. 20,00,000. Mr. A purchases a stock of office stationery of Rs. 5,00,000 and employs 4 marketing executives at a salary of Rs.10,000 to each one of them and Mr. B also purchases a stock of Rs. 5,00,000 but employs 10 marketing executives because he has extra working capital of Rs. 10,00,000. The result is obvious, Mr. A gets orders of of Rs. 8,00,000 and Mr. B gets orders of Rs. 20,00,000. More money you put into the business more profits you can make.
Most of the new businesses fail because of lack of working capital. And that is the reason why a number of people, wanting to switch from job to business are not able to do it throughout their career. More money you have in your kitty, lesser are the chances of failure and the banks or institutions would like to lend their money to the one who has a proven track record and standing and his chances of failure are much less. The banks try to reduce their risk by choosing financially strong borrowers.
Big companies are able to eliminate their small competitors on the power of money. Big companies can operate under losses for years together whereas small players will not be able to withstand losses for long. You would have seen mushroom growth of small inverter manufacturers 3-4 years back who used to assemble inverters and their cost used to be almost half of the branded ones. Then brands like Su-Kam, Microtek, Luminous, etc. slashed their prices to eliminate these small players and within 2 years most of the newly opened small inverter assembling units were closed down. After eliminating small competitors the big companies would again increase their prices and turn their losses into profits. You need money to sustain through the periods of recession. Only those businesses survive recession, which are financially strong.
The money is generated by running an enterprise, which can be created and developed by investing money. The profitability of an enterprise depends on its resources, which are bought by money again. Quality of employees depends on the package paid to them and better quality employees generate more business, which translates into more profits. You need some fuel to run a machine and money is the fuel to run a business. Thus a direct relation can be established between money invested and money returned by the business, which is directly proportional.