Investing 101 - Part 1
I know investing can seem intimidating but let’s break it down so you can master it. Firstly, let’s get to know the lingo so we can talk the talk.
Stocks: represents ownership in a publically traded company. Every company that is publically traded reacts differently to general economic news, company-specific events, industry news, etc. so that’s why you’ll hear so much commotion regarding publically traded stocks on the news.
Not all stock investments are the same so before you invest in a company, it’s important to establish what your goals are, how long you’d like to invest, and how much risk you can tolerate. Here are some general classifications of how companies are represented on the stock market:
Growth: a company who is reinvesting its earning back into the company – they can either be a newer publically traded company or introducing a new product/service so there is potential to see a higher return on your money (also potential to see a higher loss on your money if things don’t work out). Since we don’t know how the stock will perform, it’s generally a riskier investment. It’s helpful to be able to monitor often since the price can fluctuate more frequently.
Value: after the financial crisis, we learned that even some of the largest companies are vulnerable to failing so there are theoretically no non-risky investments but these companies are generally pretty strong and steady so investing in these companies can help your money grow with inflation.
Income-oriented: the goal is to get a steady stream of income from this company via a dividend (see definition below).
Dividend: income paid out to shareholders from the company’s stock you own. Not all companies issue a dividend. Usually, companies that have been established for a while or companies that are not in growth mode, will issue a dividend. The company will establish how frequently they will pay out the dividend (usually quarterly, can also be monthly, yearly).
Ex-dividend date: this is the date you would have to have owned the stock by in order to qualify to receive the dividend.
Outside of individual company stock investments, there are a few other ways we can invest.
ETF: stands for exchange-traded fund; it is a basket of stocks that follow a certain theme or index. For example, if you want to invest in technology but don’t want to buy each stock individually, you can buy an ETF that invests in a bunch of technology companies that follow that specific theme of the ETF. Since an ETF is not an actively managed fund, the fee is generally lower.
Mutual Fund: an actively managed group (or portfolio) of stocks or investments. It also generally follows a theme, strategy, or goal but it is monitored and managed by a group of investors. The fees on mutual funds can generally be higher because of this. Mutual funds also cannot be bought and sold whenever you feel like it. Each fund will have cut off times on when you can buy and sell in addition to minimum investment amounts.
You may hear the term “active management” and “passive management” – those refer to how a basket of stocks are managed.
Active management: a group of investors that will buy and sell stock to achieve the fund’s goal. That is why the fees are generally higher on those types of investment vehicles.
Passive management: not as actively traded so fees tend to be lower.
I’ll go into more details about the differences between ETFs and mutual funds in another post since there are several things to understand and consider.
As with all investments, make sure you read through the terms and fully know what it is before you invest. This is your hard earned money so don’t let it go into something you don’t fully understand!