Updated: Feb 26, 2020
Replace "shots" with "stocks" while you listen to this song and tell me you don't get hyped about investing!
Hello and Happy February y'all!
Last year, I did a brief overview of big picture investing. In one post, we talked about some common ways to invest. I followed up with another that highlighted setting goals to determine why you are investing. Lastly, we touched on big bucket types of investments you can make to achieve those goals.
We will also be doing a three-blog post series on investing this year, which will take our conversation from big picture thinking on investing to more of the nitty gritty. Today we are starting with stocks!
How many of you have heard of stocks when discussing investing? (Pause as I count the multitude of hands.) Stocks are just one asset category among many you can invest in. And surprisingly, there is a wide variety in the type of stocks you can invest in. Here are just a few.
Income Stocks: Like the name suggests, income stocks help supplement your income, and are typically less volatile than the normal stock investment. Companies often sell stocks to raise funds for expansion, which means you get less dividends in the short term. If you invest in a company who has already reached its expansion goals and has a stable profit, you are more likely to receive regular and higher percentage cash dividends. Because you receive regular cash dividends from your investment, they are called income stocks. Utility companies are often a good place to invest if you're looking for income stocks. You can check the prospectus of the company to determine how often and in what form they provide dividends.
Domestic Stocks: You'll see a pattern here in that the name of each of these stocks are very self explanatory. When you invest in domestic stocks, you invest in companies that are owned and operated within your country. Domestic stocks are great if you are investing for growth (see the big bucket blog post). They are typically more volatile - likely to experience swings in value - than income stocks.
Foreign Stocks: Foreign stocks are stocks bought from companies that are owned and operated completely outside of your country. These are potentially the most volatile stocks you can purchase depending on your knowledge of the foreign economies where you choose to invest. They are also subject to currency risk, which means that while you may have made a significant profit in the currency of the country where you own the stock, converting the money back to your country's currency may result in profit loss. It also may result in high profit gain. Either way, it is worth paying attention to currency risk when investing in foreign stocks.
International Stocks: While domestic and foreign stocks are regulated by country borders, international stocks are not. When you invest in companies that are owned and operated internationally, you invest in international stocks. This asset class is usually less risky (in terms of volatility) than foreign stocks because there are multiple economies balancing out any major swings. You can get some of the same benefits of investing in foreign stocks without the currency risk by investing in international stocks.
All the stocks types above are considered individual stocks. Investing in individual stocks is better suited for retirement, long-term plans or when you are investing for growth. All stocks are potentially more volatile than bonds or mutual funds; however, if you are investing for growth, typically you are investing for the long term. Even though they are a more volatile asset category, stocks typically do better (i.e. higher profit) in the long term as long as you plan to invest in them long enough to ride out swings in value.
Diversity of investments is important no matter what asset class you choose to invest in, and that is also true when investing within a specific asset class. When investing in individual stocks, you want to purchase stocks in many different companies (industries, markets, products etc.). Don't buy stocks only in utility or tech companies because if that market crashes, you will suffer loss universally. If you have some utility, some tech, some healthcare etc., losses will not have as much impact.
The riskiness of your investment portfolio is often determined by how much of your investments are in stocks. The more stocks you own, the riskier (more volatile) your portfolio is. This is fine as long as (a) you are investing for the long term, and (b) you have a diversity of other asset classes. Ultimately, you determine how much risk you are willing to take while still keeping your reasons for investing in mind.
Investing is just another tool in our toolbox for achieving and maintaining financial fitness. The more we know about it the better. Stay tuned for part two of this series (hint hint - its on mutual funds!), and in the meantime, happy investing!