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Introduction to the Stock Market and Companies

  1. Bits of Financial Advice for Smart, Young Adults. HANDSWORTH INVESTMENT CLUB By Sam Purcell Introduction to the Stock Market and Investing in Companies.
  2. TODAY’S AGENDA: • Recap From Last Meeting • The Stock Market • Other Types of Investments Discussion Outline
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Board of Directors Chief Operating Officer Chief Executive Officer Chief Financial Officer
  10. 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.
  11. 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.
  12. The Stock Market
  13. 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.
  14. Different Stock Exchanges
  15. 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.
  16. 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.
  17. 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.
  18. 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
  19. 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.
  20. 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.
  21. 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.
  22. 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.
  23. 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
  24. 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.
  25. 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.
  26. 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.
  27. • 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
  28. 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.
  29. Questions?