Retained Earnings

As a trader, you're always on the hunt for the next big opportunity, scouring the markets for that golden ticket to profits. But have you ever stopped to think about what happens to the money you've already made? That's where retained earnings come into play – the unsung heroes of your trading empire.

What Are Retained Earnings?

Retained earnings are the profits that a company (or in your case, a trader) chooses not to distribute as dividends to shareholders (or withdraw for personal use). Instead, these earnings are reinvested back into the business (or trading account) to fuel growth, expansion, and future endeavors.

Think of it like this: you've had a killer year in the markets, raking in profits left and right. Instead of blowing it all on a fancy sports car or an island getaway (tempting, we know), you decide to keep a portion of those earnings tucked away, ready to be deployed when the next big trading opportunity arises.

Why Are Retained Earnings Important?

Retained earnings are the lifeblood of any successful business (or trading operation). By keeping a portion of your profits in the kitty, you're essentially creating a war chest to:

• Fund future growth – Whether it's expanding your trading strategies, trying out new markets, or beefing up your research capabilities, retained earnings give you the capital you need to level up.
• Weather market storms – The markets can be unpredictable, and having a cash cushion can help you weather the inevitable ups and downs without having to tap into your personal savings (or worse, your retirement fund).
• Seize opportunities – When that once-in-a-lifetime trading opportunity comes knocking, you'll have the funds ready to pounce, instead of watching it slip through your fingers.

But don't just take our word for it. Look at the trading legends who have built their empires on the back of reinvested profits. Warren Buffett, the Oracle of Omaha himself, has famously said, "We don't pay dividends. We retain all earnings to maximize the long-term build-up of Berkshire's capital resources."

How to Calculate Retained Earnings

Okay, so you're sold on the importance of retained earnings. But how do you actually calculate them? It's simpler than you might think:

Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Paid

Let's break that down:

• Beginning Retained Earnings – This is the amount of retained earnings you had at the start of the period (e.g., the beginning of the year).
• Net Income – Your total profits (or losses) for the period.
• Dividends Paid – Any profits you've distributed to shareholders (or withdrawn for personal use).

So, if you started the year with $50,000 in retained earnings, made $100,000 in profits, and paid out $20,000 in dividends, your retained earnings for the year would be $130,000 ($50,000 + $100,000 - $20,000).

Keeping a close eye on your retained earnings is key to managing your trading capital effectively and ensuring you've got the firepower to take your game to the next level. So, the next time you're tempted to splurge on that shiny new sports car, remember – those retained earnings might just be the key to your trading empire's growth and longevity.