The basics are important for your foundation:
“Whether you think you can or you think you can’t, you’re right.” – Henry Ford
Your future financial success is based on the actions YOU take today.
Finance and investing appears like a confusing subject, but with the right tools you can be successful!
The best way for success is having a base knowledge of investing, terms, and ways to get started on your journey. Let’s start off with talking about the basics regarding stocks, bonds, mutual funds and ETFs.
What is a stock?
Stock is a piece of ownership in a company this is also called common stock. When you buy a share of stock, you are an owner of this company. For example, if you buy 1 share of Boeing, you are a shareholder. You own a very, very small portion of this business. As a stockholder, you at times can obtain a portion of earnings through a dividend.
What is a bond?
At times, companies will sell debt to finance purchases or obtaining cheaper debt. A bond is company debt or a loan. You can purchase a portion of this debt, and when you do, you become a bondholder. As a bondholder, you obtain interest for buying this debt.
What is a dividend?
When you are a stockholder, the business can distribute a portion of their earnings as a payment to you being a shareholder in the form of a dividend.
What is the difference between ex-dividend date versus record date?
Dividend ex-date is typically one business day before the record date. If you wish to obtain the dividend, you will need to purchase or already hold the stock BEFORE the ex-dividend date. The record date is the date which the company reviews to see who owns shares of its stock on this day.
What is the dividend yield?
Dividend yield is the percentage of the dividend divided by the current stock price. For example, if the stock price is at $20 and the annual dividend is $1. The current dividend yield would be 5% or $1/$20.
What is beta?
Beta is a form of risk. The S&P 500 is a beta of 1. We call this the middle ground. A beta above 1 means it will be riskier. Below 1, means the risk is lower than the S&P 500.
What is P/E?
P/E or Price to Earnings is a formula where you take the current price of a stock divided by the earnings of this company. A high P/E ratio could show a possible overvaluation.
What is P/B?
P/B or Price to Book is a formula where you take the current price divided by the book value. The book value takes all assets minus liabilities (in other words how much cash and assets does the company own after paying off debt) and divides this by the total shares outstanding.
What is a Mutual Fund?
Imagine a basket of eggs, but instead of eggs you can eat, these eggs are companies. You can purchase a mutual fund that targets US Large Cap Growth companies. When you buy a share of the mutual fund, you are owning pieces of these large companies, such as Microsoft or Apple. You pay an annual fee for owning this mutual fund. Mutual funds try and beat the benchmark, which is why the fee can be higher at times.
What is an Exchange Traded Funds (ETFs)/Index Funds
ETFs or Exchange Traded Funds are passive investment vehicles. Imagine the basket of eggs again, per the Mutual Funds example. The difference here is in composition and cost. An ETF fund like SPY is looking to match the S&P 500. We call matching the benchmark passive investing. These funds are simply trying to mimic the index or benchmarks. The upside is the cost can be significantly lower. SPY fund for example costs 0.09%.
Learning the basics of investing is crucial for your financial wellbeing. You must learn these basics as your foundation. Once you have a good foundation, you can build upon that knowledge. Your financial future is up to you and only you. What are you going to do about yours?
Until next time,