During the quarantine here in Canada, I started reading many books on investing and personal finance, because, let’s face it, I had nothing better to do. I wanted to be financially literate and invest my money so that it would benefit me in the long run. I read about the different investment tools that people use.
Today, I am much more comfortable with the different investment tools and this is why I want to share this information with you. I want you to be financially literate so that you can make sound decision with your money. Before reading books, I had a fear about losing my money in the stock market. However, if done intelligently, investing in the stock market is a great tool to grow your wealth.
Before getting into the different investment tools, I just want to mention that I am not a financial advisor, so I am not responsible for the financial decisions you make. My goal here is to differentiate different investments tools so that you can make you own decisions. This will be an overall review of each investment tools!
Now, let’s dive right in!
A stock represents the ownership equity of a company. The units of stocks are called “shares” and these are the products traded on the stock market. When you purchase shares, you essentially own a percentage of this company. Let’s take an example.
Let’s say that, using a trading platform, you buy 100 shares of company X at 5$. This means that you purchased 500$ worth of shares of that company. Now, you own a part of the company and you can help make decisions in that company such as choosing board directors or others.
Now, several factors must be taken into account when looking at different shares.
First, you can look at how the company is doing in terms of the price of its share. Many people assume that the best options are to buy the stock when it’s low, but I use a different approach. I look at how many times the stock hit its highest mark in the last 52 weeks. If the stock reached its highest price 50 weeks, then it can be an indication of how well the company is doing and I might want to look deeper in that company to invest my money. This link will let you see which company reached its highest mark in the last 52 weeks in the US market: https://www.barchart.com/stocks/highs-lows?orderBy=highHits1y&orderDir=desc
Second, I am looking at the dividends. Dividends (or yield) are a percentage of money that the company will give back to its shareholders. It’s a small percentage, usually from 1 to 5%. You can invest based on the fact that company offer dividends or not, but be careful, because sometimes they won’t always pay them if they have difficulties, or they will go bankrupt because they pay too much. Do your research before investing in these companies.
This is the platform I use to buy my stocks (only on mobile): https://my.wealthsimple.com/app/public/trade-referral-signup?code=OLDHJG
ETFs (or Exchange-Traded Funds) are a mix of stocks and index funds. They have the characteristics of index funds, but they trade just like stocks. ETFs track a certain index funds, but they can be traded just as easily as stocks on the market. For example, the VOO ETF tracks the S&P 500, but you can buy shares of that ETF.
ETFs are a great way to minimize your risk and diversify your investment portfolio. Since ETFs are collection of stocks from different sectors of the economy, you get to have the best of each sector. Also, if one sector doesn’t do so well at times, the others can compensate and the risk of losing is greatly reduced. Plus, ETFs often offer dividends!
When you begin your investment, I strongly recommend investing in ETFs because they are low risk investment and you get some return in the form if dividends.
Index funds are simply a collection of many different eggs which is designed to match the performance of the market. It eliminates the risk of picking stocks individually. The only risk of holding index funds is the overall risk of the stock market.
The best example of an index fund is the traditional S&P 500. This fund tracks the 500 biggest companies in the US and, by investing in them, you get the return and you get results.
Index funds also have a very low expense ratio. Simply put, they are cheap to own. Index funds are not only a great tool for beginners, but they are a great tool for investors regardless of their experience. The author of “The Little Book of Common Sense Investing” Jack Bogle greatly demonstrates how holding index funds forever is one of the best tool to grow wealth over time. The S&P 500 had some down years, but almost every year it finishes in the green, so holding the S&P 500 for 30 years can be very profitable for you.
Another very very important part of investing and its different tools are the fees associated with them. Fortunately, the fees for purchasing stocks and ETFs on Wealthsimple Trade are $0, but the ETFs do have expense ratio. Expense ratio can really kill your capital gains over time, and that’s why you should aim to buy low-priced ETFs that track the market for maximum return.
Index funds are also very cheap to own, making them very attractive for investors. Plus, stocks don’t have any fees, so this is great, but they come with certain risks like I mentioned earlier.
Make sure you really know how much you are paying for an ETF or an index funds before purchasing it, and really calculate how much it can cost you in the long run.
All in all, investing is a long journey in which patience and self-control is primordial. The market will often regress, but don’t get scared. Historically, the market always goes up after a down period. Investing is about making money passively; it’s about growing your wealth through patience and self-control. Investing is not about making money rapidly; this is the purpose of trading. You can also set financial goals when investing. To know how to create great goals, click here.
I hope you liked this article and I hope you are now more comfortable with the different investment tools!
I will put down some of my favorite books on investing so you can benefit from it as well! Reading books is another great investment, so you should get as much information as possible before making important financial decisions.
The best book on index funds: https://amzn.to/3kJ7G7m
The best book on stocks: https://amzn.to/3nvTzno
My investment platform (Canada only): https://wealthsimple.com/invite/S5F-JG