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How MasterCard makes money from us, and how you can profit from it.

By Terence Teoh on 25th May 2016 in News
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Mastercard

You probably have at least one of these in your wallet or purse right now.

Credit cards have become an essential part of our life, especially when we are getting very used to purchasing stuff on the internet – won’t you agree? From a consumer stand point, we know that we are paying fees to the bank every time we use our credit card, aside from the annual fee to keep the card.  But do you know how MasterCard or Visa actually make money?  Knowing that might just help you make money from it!

MasterCard is a Fortune 500 company listed in the U.S. stock market since 2006.  Their 3 main income source are:

  1. Domestic Assessments” – fees charged to ours’ and the merchants’ bank, in the same country.  So let’s say you use your MasterCard from ABC Bank to pay for coffee in your neighborhood Starbucks, ABC Bank and Starbucks will be paying MasterCard some fees – a percentage of the sales.
  2. Cross-border Volume” – when you buy something from overseas merchants, Mastercard will then charge additional fee plus currency conversion fee.
  3. Transaction Processing” – MasterCard’s core business is providing of a sophisticated global system that facilitates all kinds of financial transaction like authorizations, interbank transfers, fund settlement etc.  Every time the system is used by you and me, the merchants and the banks, MasterCard gets paid.
Source: Mastercard Quarterly Earnings Report Q1 2016

Source: Mastercard Quarterly Earnings Report Q1 2016

You probably realize now how massive the volume of transactions can be, given that there are 2.2 billion cards issued by MasterCard in this world and growing day by day.  Rather than being just a regular contributor to their revenue, wouldn’t it be good if you had stepped over to the other side and become a shareholder?

Mastercard is being touted as a forward looking company – they are putting effort into innovation, bringing their services to new areas.  They have been working with governments to make everything that requires payment like transportation system or salary payout more efficient.  Those are some of the reasons MasterCard has been a favorite among many investors like Kathlyn Toh, our Chief Analyst and Coach.

Disclaimer – this is not a recommendation to buy or sell securities nor an offer to buy or sell securities.  The publishers of Beyond Insights are not brokers, dealers or licensed investment advisors and do not attempt or intend to influence the purchase or sales of any security.  The information presented here is purely for case study and educational purposes only.  Decision making process in investing requires more detailed analysis that is not covered in this article.

Mastercard Stock Chart

MasterCard Stock Chart (source: MasterCard Investor Relations)

5 years ago the stock price of MasterCard (NYSE:MA) was around $27.  As of today it is trading around $96. That means if you have invested in MasterCard 5 years ago your gain today will be about 250%, which translates to 50% a year on average.

Is it feasible for me to invest in a company listed in U.S. if I live in Asia?

The answer is definitely yes.  Many local banks and brokers already provide services to help their clients invest globally.

It is also possible for anyone to open an account directly with a U.S. based broker, which will allow you to place your own trades at a much lower transaction cost.

Is it easy to find other companies with this kind of growth, or are they scarcely found?

It is easy to find if you look at the perspective of global stock market. For example, see our previous post on Starbucks.

Getting into the global stock market (or any stock market)

The key to success:

  1. Ability to find companies with strong potential for growth.
  2. Ability to identify the best timing to buy and sell your investment.
  3. Ability to protect your investment and manage the risk.

You can also accelerate your return by using leverage instruments, provided you know how to use them with good money management principles, i.e. always use it to minimize your risk and not to increase it.

The 4 points above will be covered in more detail during our upcoming public seminar Global Investing Made Simple.

Source of information: Mastercard investor relations

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