Today I will be talking about stocks. No. Not chicken stocks. I'm talking about owning a portion of a company that you believe will do well over time. That portion would be called a stock/share.
By definition:
A stock (also known as "shares" or "equity") is a type of security that signifies proportionate ownership in the issuing corporation. This entitles the stockholder to that proportion of the corporation's assets and earnings. - Investopedia
A stock is a type of investment that represents an ownership share in a company. Investors buy stocks that they think will go up in value over time. - Nerdwallet
As we can see from the definitions, the keywords are:
1. Ownership
2. Go up in value over time
3. Entitles the stockholder to ... asset and earnings
So.... what is a stock? Let me illustrate this with an example:
I have an awesome business plan, but I do not have the capital to start it. I have $5,000 in my own savings and I raised money from my friends and family to have $10,000 in total. My friends and family would have a 50% share of this company.
This is similar to a company, where the company would try to raise money by distributing shares to the public/ financial institutions. Owning some of these shares would make you a shareholder of the company. In times where the company makes a profit, there can be dividends distributed to the shareholders or it can be reinvested for future earnings.
Here are some of the different types of stocks, I will sort them out in terms of growth out of 5 Midas' touches. The categories are price, growth, dividends, earnings, stability:
1. Blue chips (Price - 5/5, Growth - 4/5, Dividends - 4/5, Earnings - 4/5, Stability 5/5)
They are the leaders in their industries, they have strong-ish growth potential and they are expensive to own as well. They are suitable for investors that have the capital to buy their stocks, aiming for stable dividends and want some growth (not as much as growth stocks as they are already the largest in their industries). Examples are Coca-cola, Disney, Intel, Microsoft. In a Singaporean context, it would be DBS, UOB, OCBC, Hong Kong Land holdings, Capitalands, Dairy Farm
2. Growth (Price - 2/5, Growth - 5/5, Dividends - 1/5, Earnings - 4/5, Stability 3/5)
These are companies that are expected to grow in prices. These companies may have a higher profit margins, higher year-on-year (YOY) growth or higher growth percentage compare to their peer. As they would be focused on growing their business, and like-wise, share prices, you should not expect dividends from growth companies and should expect more volatility. Examples are: Amazon, Facebook, Qualcomm (You can expect a lot of tech stocks)
3. Income (Price - 3/5, Growth - 2/5, Dividends - 5/5, Earnings - 4/5, Stability 5/5)
These are the companies with strong and stable income sheet. They are companies that have quite a bit of earning every year but might not have opportunities to invest these earnings for future growth. Hence, they would distribute these earnings as dividends to their investors and they would have a higher dividend yield compared to their peers. Some of these companies can be found on the S&P 500 Dividend Aristocrats Index - Companies with a track record of increasing dividends for at least 25 years. Examples are 3M, Caterpillar, Oracle etc.
4. Value (Price - 3/5, Growth - 4/5, Dividends - 5/5, Earnings - 4/5, Stability 5/5)
Have you heard of value investing? It means to find stocks that are currently trading at a price lower than the value that you perceive it to be. Your perceived value can be influenced by the management of the company, the brand power, the cash flow and so on. This is made famous by the Oracle of Ohama - Warren Buffett.
5. Penny (Price - 1/5, Growth - ?/5, Dividends - ?/5, Earnings - ?/5, Stability 1/5)
Have you watched "The Wolf of Wall Street" starring Leonardo DiCaprio? The movie was portraying Jordan Belfort, who was a former stock broker that sold penny stocks to people. Penny Stocks are low-priced and speculative in nature. Many stock exchanges would not allow them to be traded. These are meant for investors that seek a rapid growth by buying into their stocks. HOWEVER, because they are speculative in nature, and their value might not be based on tangible assets, I would not recommend anyone without deep financial understanding to invest in them.
My personal portfolio:
I have not bought into any individual stocks as I do not have enough capital to buy into stocks while ensuring sufficient diversification. Hence, I will be sticking to ETFs at the moment. I do have a few stocks that I am looking out for. But as I cannot disclose them as I am not qualified to make any recommendations to anyone.
With that,
I end the second of this new series.
Stay vested, Stay frugal my friends,
Dionysius
Sourceshttps://www.nerdwallet.com/blog/investing/what-is-a-stock/
https://www.investopedia.com/terms/s/stock.asp
https://www.cashay.com/types-of-stock-blue-chip-penny-growth-income-value-153353359.html
https://www.drwealth.com/blue-chip-stocks/
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