Investing 101 - Types of Investments - RIS - Ryan's Investment Strategies

Investing 101 - Types of investments

Types of Investments

Stocks

What is a stock?

A stock represents an ownership in a company. If you buy a stock from a company, you become a shareholder. Shareholders are entitled to a proportion of the corporation’s assets and profits equal to how much stock they own. A company will issue stock in order to raise money for its business.

Keep in mind that investors can predict whether the stock market is going to go up or down but they will never know for sure.

How do I make money off of stocks?

Great question! There are 2 ways to make money off of stocks:

Stock appreciation, when the stock price increases, so does your money (at least on paper).
Dividends, these are commonly paid out monthly or quarterly made by the company. Keep in mind that not all companies pay a dividend and the dividend amount varies between industries (i.e., Banks are known for high dividends but their stocks do not appreciate).

Types of stocks

Income

An income stock pays regular dividends and offers a higher dividend yield compared to other companies. These stocks can come from any industry but are commonly found in real estate investment trusts (REITs), energy sectors, utilities, natural resources and financial institutions.

Examples of Income Stocks include:

Walmart
Verizon
Microsoft

Value

A value stock trades at a lower price relative to its dividends, earnings, or sales. These stocks are appealing to investors for that reason.

Common characteristics of value stocks include:

High Dividend Yield
Low P/B ratio
Low P/E ratio

Examples of Value Stocks include:

JPMorgan
RBC
Coca-Cola

Growth

These are companies that have substantial potential for growth in the foreseeable future. Growth companies are typically growing at a faster rate than the overall markets and use their current revenue toward further expansion within their business.

Examples of Growth Stocks include:

Amazon
Tesla
Netflix

Dividend yield

When looking at companies that pay out dividends, look for a dividend yield between 2% and 4%. The dividend yield is the percentage that you get paid out from the company. For example, if you invest $100 into ABC stock and it has a dividend yield of 2%, you will get paid $2 from ABC for the year. Individuals can find this information online by visiting dividend.com. RIS looks for a dividend yield between 2% and 4% and a growth rate of 6% or more depending on the dividend yield. If the yield is closer to the lower side (2%), we will look for a double-digit growth rate. If the yield is closer to the higher side (4%), we will not worry if it is growing quite as much.

Finding a balance between the two is important because you want to maximize the amount of money that you can make.

Below is a dividend.com video showing how you can view dividend yields

Why buy stocks?

Stocks let you own a piece of a company and make money through the appreciation of the stock itself as well as dividends (if the company pays out one).

Bonds

What is a bond?

A bond represents a loan made by an investor (you) to a borrower. Bonds are issued by governments and corporations to raise money for projects and operations. A fixed interest rate (coupon rate) is paid to the bondholder for the amount of time that they hold the bond. Interest payments are usually made annually or semiannually. Bond prices are inversely related with interest rates (when rates go up, bond prices fall and vice versa).

Length of bonds

Maturity is the date when the principal (the amount you invested) is paid to investors and the company’s bond obligation ends. There are three classifications of maturity:

Short-term: Bonds that have a maturity of one to five years.
Medium-term: Bonds that have a maturity of more than five years.
Long-term: Bonds that have a maturity of fifteen years or more

Why buy bonds?

Although bonds do not give you ownership in a company, they do provide a hedge (protection) against stocks and offset the volatility that you might see from owning stocks.

Index Funds

What is an index fund?

Created by Jack Bogle (founder of the Vanguard Group), an index fund is a portfolio of stocks or bonds that track the performance of a market index (covered below in the Stock Market section). Bogle thought that rather than bunching a group of stocks into a mutual fund with the hope of beating the market, he found a way for individual investors to compete with the pros. Index funds seek to match the risk and return of the market. The theory is that in the long-term, the market will outperform any single investment.

Examples of Index Funds

S&P 500 (tracks the largest 500 companies listed on stock exchanges in the U.S.)
Dow Jones Industrial (tracks the 30 largest companies listed on stock exchanges in the U.S.)
Russell 3000 (tracks the 3,000 largest publicly traded U.S. companies, about 98% of the U.S. equity market)

Why buy index funds?

Index funds provide you with a diversified portfolio by including a variety of companies. Warren Buffet called an S&P 500 index fund “the best thing” for most people who want to invest. The S&P 500 has delivered average annual returns of almost 10% going back 90-plus years.