Is McDonald's a buy?
McDonald's Corporation is an American company known for its hamburger restaurants around the world. It was founded by brothers Richard and Maurice McDonald in 1940, who first implemented the fast food concept inspired by Henry Ford.
Initially, the McDonald brothers did not have as broad a business vision as the company has today. It was Ray Kroc who would take the company to success, becoming the first successful McDonald's franchisee in 1955.
By 1960, Kroc would buy the company from the McDonald brothers for 2.7 million dollars, thus becoming the owner of the company. Since then, the company has grown to more than 36,000 restaurants in 118 countries. Ray Kroc turned the company into one of the most successful companies worldwide, although its real business is not hamburgers.
McDonald's business model: hamburgers or real estate?
Although McDonald ‘s is a fast food restaurant chain that primarily sells hamburgers, most of its revenue does not come from selling food, but rather from renting its properties, i.e., real estate.
Only 5% of the restaurants are wholly owned by the company, the rest are franchises that operate almost like any other well-known franchise. That is, the franchisee pays the brand (McDonald's) to have the rights to use the brand to make a profit.
Thus, McDonald's gets paid for the franchise, is the supplier of the restaurant and also gets a share of the monthly profits of each restaurant. But in addition to this, McDonald's gets paid rent for the space where the franchise is located since the company owns all the locations.
Each time a new McDonald's opened, the company would first buy the land and fit out the location and give the franchisee the finished restaurant. Thus, the franchisee is only responsible for the management and operation of the restaurant.
This is how McDonald's came to own more than 36 locations that it rents to its franchisees as part of the franchise agreement. And that is why, although the company only fully manages 5% of the restaurants, it generates annual profits in excess of 20 billion dollars.
And this allows it to offer attractive dividends to holders of company stock (dividends are the portion of profits distributed to investors) that have historically increased year after year. As a result, McDonald's is a company that every investor tends to include in his or her portfolio.
What kinds of financial assets can you trade?
Meet the Exchanged Traded Fund
ETFs or Exchange-Traded Funds are a kind of passively managed fund, similar to index funds. We can say that ETFs are halfway between stocks and funds: they can be traded like regular stocks, but include a wide diversity of assets and have lower fees.
About Index Funds
This is the best option for people who can invest in the long term, mostly for beginners, because it is less expensive, diversified, and safer.
You may think differently, but beating the benchmark is far from being a piece of cake and very few fund managers have done it, apart from some specific cases, like Warren Buffett's.
If a fund manager brags about having beaten the benchmark, they probably have done it for a chor period or on a specific occasion, or perhaps the rates are so high that indexing would be a better decision.
The good thing about index funds is that they perfectly solve both issues: their fees are minor and they frequently beat active managers, but in the long term.
Foreign exchange market
What is known as Forex trading consists in the trading of currencies. It's the conversion between two currencies to make a profit through the operation.
If you decide to exchange euros and dollars, you purchase euros and pay with dollars, with the expectation that after obtaining the first currency (the euro) it will revalue compared to the second (the dollar), to make a profit by selling it. Assume you entered when the price of one euro is 1.10 USD and you exit when it reaches 1.15: that difference is yours once you sell again.
Perhaps you already inferred this, but this type of trading usually implies investing a lot, because prices never increase that much, or using much leverage, which you know is a risk. Our recommendation for those starting in the world of trading is to choose another market to begin with, since Forex is risky and complex.
This broker allows trading with the most common currency pairs. Nevertheless, take into account that Forex trading functions through CFDs, thus the underlying asset won't be yours.
About Contracts for Difference
If you have entered this broker before, you must have seen how the acronym CFD appears all the time. Before we explain this further, we must say that CFDs on this broker are only possible when you are short-selling.
We will also refer to terms like short-selling and leverage, in case you are considering day trading cryptocurrency or more advanced practices.
The good thing about this broker is that it allows you to bet both “in the black” and “in red”. Let's say that you believe that the McDonald's will go down, so perhaps it is obvious to think “if it is going to depreciate (go down in price), I simply refrain from getting in and I'll go in when it has gone down”. But if it actually goes down, you can make some profits out of that.
You can accomplish that by “going short”. More or less, this is how it works:
- You ask someone for a loan of, let's say, 100 units of McDonald's, which total price at the moment is $ 5,000 (obviously, these numbers aren't real)
- You sell the 100 units and earn $ 5,000
- The McDonald's devaluates from $ 50 to $ 30
- You buy the 100 units again, but at their current price, $ 3,000
- You return the 100 units to the loaner
- The difference is yours, so, you will have earned $ 2000
It is really simple. Just take into account that by trading in McDonald's on this broker, with CFDs you can make money when you anticipate downs.
How to use leverage in trading
In case you haven't heard about “leverage”, we'll put it short. When trading, it's the capacity of enlarging your investment without putting extra money. For example, if you start with $ 100 and you leverage x2, your initial investment will be $ 200.
Leverage and the importance of “Take Profit” and “Stop Loss”
Let's pretend that you are confident that McDonald's will raise its price, and you consider “going long. You have $ 1,000, but you actually can invest more and make more money.
You could go to your bank, request a loan, wait for it to be accepted and receiving the money, send the money to your broker, confirm that it arrived, and then obtain McDonald's… Nevertheless, when you finish doing all that, probably McDonald's would be already much higher (if your prediction got confirmed), and it wouldn't be a good idea to invest then.
Using leverage, you can obtain that amount of money really easily. It's like a loan, but much easier and quicker, and with the benefit that you will be getting it directly from the broker which will let you invest much more than you have on the platform. You will simply see the different options as in the screenshot:
Within other markets, the leverage you can choose is higher. This is because cryptocurrencies usually represent medium-long term investments. However, leverage is used mostly for day trading or short-term trading. Let's talk a bit more about how leverage works:
- If you decide to invest $ 1,000 and you use leverage x2, you will be starting with $ 2,000 (remember that$ 1,000 are a “loan” from your broker).
- A few days later, McDonald's price does increases, as you assumed, and now the price of your investment is $ 2,400 (20% higher), so you decide to sell back because you want to play it safe.
- The $ 1k of leverage will be deducted, and you will have $ 1,400 left; which means the net profit is $ 400, since the other $1,000 was yours from the beginning.
In conclusion, by investing $ 1000 and obtaining $ 400, your net profit would be 40%. That is quite good.
Does it sound too wonderful? The trick is that the risk of losing out is also there. If everything goes according to plan and the price goes up, you will earn profits in little time; but if the opposite happens, you will also lose more really fast.
For example: if the price falls by 10%, you do not lose $ 10, but twice that figure, which means $ 20. That is why to operate with leverage it is essential to take into account Take Profit and Stop Loss.
Take Profit is a limit you can set when trading: you set the platform to sell your assets once they get to a point above the entry price. For instance, you can buy McDonald's shares at $ 100 and ask your broker to close your position automatically when it reaches $ 120. It is very helpful to avoid being blinded by enthusiasm: a 20% profit is usually very good, but once you see the price has risen, you might think you can earn even more, which is not always the case. As a result, you might lose money if you don't close on time. So, Take Profit helps you to trade more safely.
Stop Loss is even more necessary, mostly if you use leverage, because a small loss with leverage can have a significant impact. Take into account that the broker will recommend a limit for Stop Loss, but it is better to set it lower than the platform suggests.