Bits of Financial Advice for
Smart, Young Adults.
HANDSWORTH INVESTMENT CLUB
By Sam Purcell
Introduction to the Stock
Market and Investing in
Companies.

TODAY’S AGENDA:
• Recap From Last Meeting
• The Stock Market
• Other Types of Investments
Discussion Outline

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 “term of the loan”.
• Examples of liabilities include loans
and mortgages.

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.

Personal Assets
• Your net worth (how much you are worth) = assets – 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.

Business Assets
• Assist in production or growth.
• A company’s balance sheet lists its assets and shows how they are financed.
• A balance sheet is a financial statement that provides
a company’s assets, liabilities, and shareholders’ equity.
• A balance sheet provides a snapshot of how well a
company’s management is using its resources.
• In other words, it shows what a company owns and owes, as well as the
amount invested by shareholders.

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.

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.

Board of
Directors
Chief Operating
Officer
Chief Executive
Officer
Chief Financial
Officer

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.

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.

The Stock Market

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.

Different Stock Exchanges

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.

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.

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.

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

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.

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.

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 country’s stock
market and are made up of the biggest companies representing various
economic sectors.
• YOU CANNOT BUY AN INDEX!
• Bob can’t buy the S&P 500, but for a small fee he can buy an ETF/index fund
that tracks this index.

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.

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

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.

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, Vanguard’s 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.

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 ETF’s, this is called a
management expense ratio.
• Unlike ETFs, Mutual Funds trade ONLY once a day.
• Not traded on an exchange.

• 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

This does not mean ETFs are better than Mutual Funds
• Mutual fund and ETF comparisons are not apples to apples because they don’t 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.

Questions?