1. Bits of Financial Advice for
Smart, Young Adults.
HANDSWORTH INVESTMENT CLUB
By Sam Purcell
Introduction to the Stock
Market and Investing in
Companies.
2. TODAYâS AGENDA:
⢠Recap From Last Meeting
⢠The Stock Market
⢠Other Types of Investments
Discussion Outline
3. Liabilities:
⢠A liability is something a person or company owes.
⢠Normally owed to a financial institution or third-party lender.
⢠Liabilities tend to be of monetary value (dollars).
⢠Liabilities are settled over time.
⢠Referred to the âterm of the loanâ.
⢠Examples of liabilities include loans
and mortgages.
4. Assets
⢠An asset is anything of value or a resource of value that can be converted
into cash.
⢠Individuals, companies, and governments own assets.
⢠For companies, assets may generate revenue.
⢠Company assets are anything the company can use to benefit in some way
from owning or using the asset.
⢠Tangible assets (not including money in your
account) depreciate in value over time.
5. Personal Assets
⢠Your net worth (how much you are worth) = assets â liabilities.
⢠Assets are everything you own, and liabilities are everything you owe.
⢠Positive net worth means your assets are
greater in value than your liabilities.
⢠Negative net worth means your liabilities exceed your assets.
6. Business Assets
⢠Assist in production or growth.
⢠A companyâs balance sheet lists its assets and shows how they are financed.
⢠A balance sheet is a financial statement that provides
a companyâs assets, liabilities, and shareholdersâ equity.
⢠A balance sheet provides a snapshot of how well a
companyâs management is using its resources.
⢠In other words, it shows what a company owns and owes, as well as the
amount invested by shareholders.
7. Stocks
⢠Stocks represent ownership equity in a company.
⢠Gives shareholders voter rights and claim on corporate
earning in the form of capital gains or dividends.
⢠Dividends: Payments of profits made by a company to its shareholders. E.g. Apple pays
shareholders just under $1 a share in their profits.
⢠Capital Gains: The difference between your purchase price and the value of the share
when you sell it.
⢠If someone owns 100,000 shares of a company with 1 million outstanding shares (all
shares issued), they will have 10% ownership stake in it.
⢠Most companies have outstanding shares that go into millions or billions.
8. Board of Directors
⢠Different from the executive members of a company (CEO, CFO, COO).
⢠They are a group that represents the shareholders of a company.
⢠Shareholders of public companies choose the board of directors.
⢠In charge of the strategic direction of the company.
⢠Decide whether shareholders receive dividends.
⢠Hire or fire top executives including the CEO and
decide on their pay.
10. Common Stock
⢠Investors have voting rights. You can vote for the board of directors, approve
major corporate decisions (mergers and acquisitions).
⢠More suitable for long-term investors as the potential gain is almost
unlimited.
⢠Value can rise dramatically over time.
⢠Investors are more likely to lose their money.
11. Preferred Stock
⢠Works more like a bond.
⢠Receive more dividend payments if a company profits.
⢠Dividends are fixed at a certain rate, while common stock
dividends can change or get cut entirely.
⢠The label "preferred" comes from three advantages of preferred stock:
1. Preferred stockholders are paid before common stockholders receive dividends.
2. Preferred shares have a higher dividend yield than common stockholders or bondholders
usually receive (very compelling with low interest rates).
3. Preferred shares have a greater claim on being repaid than shares of common stock if a
company goes bankrupt.
14. What is it?
⢠Where you buy and sell stocks and other
investments.
⢠Individual or institutional investors come together to buy and sell shares
publicly.
⢠Institutional investors are companies or organizations that invest money on
behalf of clients or investors. (e.g. Hedge Fund, Mutual Fund).
⢠Buying and selling shares are done through stock exchanges.
⢠There can be multiple different exchanges in a country or region.
17. TSX
⢠Toronto Stock Exchange
⢠More than 1500 listed companies (energy, mining, technology, and real
estate).
⢠Bank of Montreal, Canadian National Railway, Fortis, Canopy Growth
Corporation, Loblaws Companies Limited.
⢠Fully electronic.
18. Nasdaq
⢠National Association of Securities Dealers Automated
Quotations.
⢠Global electronic marketplace.
⢠More than 3000 stocks listed.
⢠Known for technology companies such as Apple, Microsoft,
Google, Amazon, and Intel.
⢠Lists popular cryptocurrencies.
19. NYSE
⢠New York Stock Exchange on Wall Street.
⢠Largest equity(stock)-based exchange in the world.
⢠Open Monday through Friday from 9:30am to 4pm EST.
20. How do Stock Markets Work?
⢠Stock markets are where individual and institutional
investors come together to buy and sell shares in a public
venue.
⢠Nowadays these exchanges exist as electronic
marketplaces.
⢠Share prices are set by supply and demand in the
market as buyers and sellers place orders.
⢠If lots of investors like Apple as a company and want to buy
shares, the share price will go up.
⢠If more people want to sell shares of Apple than there are
21. How do Stock Markets Work?
⢠In a typical transaction, the seller thinks the stock is at its
peak price, while the buyer expects it to rise in value at some
point in the future.
⢠Order flow and bid-ask spreads are often
maintained by specialists or market makers.
⢠This ensures an orderly and fair market.
⢠Lots of people trade (buy and sell) shares on the
stock market.
⢠The average trading volume for the NYSE is 2-6 billion
shares sold a day.
22.
23. Buying Securities
⢠To buy any security you need a broker.
⢠This can be through a full-service broker or through an electronic broker
such as Wealth Simple, Questrade, or RBC Direct Investing.
⢠You need to pay a fee to your brokerage advisor or account.
⢠This fee is higher as you gain more advice from your broker.
⢠For Wealth Simple, the fee is low as you do all the work yourself.
⢠For a full-service broker or money manager, this fee is much higher.
24. Stock Market Index
⢠You have probably heard of the S&P 500 or the Dow Jones Industrial Average.
⢠Broad stock market indexes are benchmarks that reflect a countryâs stock
market and are made up of the biggest companies representing various
economic sectors.
⢠YOU CANNOT BUY AN INDEX!
⢠Bob canât buy the S&P 500, but for a small fee he can buy an ETF/index fund
that tracks this index.
25. ETF
⢠Exchange Traded Fund (traded on an exchange just like stocks).
⢠Tracks an index, sector (group of stocks that have lots in common),
commodity, or other asset, but can be purchased on a stock exchange the
same as a regular stock.
⢠Structured to track anything from the price of an individual commodity
(gold) to a large and diverse collection of securities.
⢠For example, SPY is an ETF that tracks the
S&P 500 index.
26. ETF
⢠ETF share prices fluctuate all day as the ETF is bought and sold.
⢠Fewer broker commissions than buying the stocks individually.
⢠Offer lower expense ratios.
⢠Expense ratio: It is the cost of owning the investment.
⢠All the fees lumped together inside an
investment fund.
⢠When all the fees are added up, they come to an
annual percentage
27. ETF
⢠Two common ETF providers: iShares and
Vanguard.
⢠Two of the more common ETF strategies
are passively managed and actively managed.
⢠Active ETF: A portfolio manager will undertake stock research to determine
which securities or stocks to hold and in what percentages.
⢠Passive ETF: There is little management needed to be done. Passive ETFs
usually track an index or other funds that are on the stock market.
28. ETF
⢠ETFs charge a management expense fee (MER). This is the fee an investor
pays as compensation to the ETF providers.
⢠Passive ETFs charge a lower fees as portfolio managers do little
customization. ETFs usually track another entity. (.05%-.25%)
⢠Active ETFs are more customized so the fee is higher. Portfolio managers do
more to help the ETF grow in value. (.20%-.50%)
⢠For example, Vanguardâs passive S&P 500 ETF has an expense ratio of only
.06%.
⢠If you have $10,000 in the ETF, you will have to pay only $6 for owning it.
29.
30. Mutual Funds
⢠A basket of stocks. They can include stocks, real estate, bonds.
⢠Mutual funds are managed by a portfolio manager.
⢠They research and pick stocks they believe will be successful.
⢠In a mutual fund, investors pay the portfolio manager a fee for managing the
portfolio.
⢠Like fees charged on ETFâs, this is called a
management expense ratio.
⢠Unlike ETFs, Mutual Funds trade ONLY once a day.
⢠Not traded on an exchange.
31.
32. ⢠Expense Ratio for ETF:
⢠You save $100 a month
⢠For 40 years
⢠10% rate of return.
⢠Expense ratio is .06%.
⢠You will have $626,120
⢠Expense Ratio for Mutual Fund:
⢠You save $100 a month
⢠For 40 years
⢠10% rate of return.
⢠Expense ratio is 1.5%
⢠You will have $403,865
⢠The 1.5% fee cost you -$233,813
⢠The .06% cost you only -$11,558
33. This does not mean ETFs are better than Mutual Funds
⢠Mutual fund and ETF comparisons are not apples to apples because they donât hold the
same investments.
⢠If all things were equal and expense ratio (cost) was the only difference, then ETFs would
be better.
⢠Many mutual fund managers do not outperform indexes,
but there are money managers that have had a history
of outperforming stock market indexes.
⢠Active ETFs are much like mutual funds as they have
money managers that implement a portfolio strategy.
⢠These ETFs are closer in cost to that of a mutual fund.
⢠Cost is important but it is not everything.