Congratulations. You’ve finally made it. You found a way to put aside some discretionary income and you now have enough savings to separate yourself from the 63% of Americans living paycheck to paycheck. It is time to start investing now, you are ready and want in on some of that stock action. You are tired of hearing how much money everyone else has made during the bull run and you want in. What comes next?
Understanding investing in stocks
You want to invest in stocks. However, do you have an understanding of what stocks are? Do you understand the risks involved. Do you have a fundamental understanding of what you will be doing when you choose to invest?
Let’s talk about the main class of stock out there. Most of the time it is called “common stock.”
Here is an example of how stocks work on a fundamental level:
If we started ABC Company, INC together and our corporation consisted of only 5 originators we would authorize a small portion of stock. We will use 1000 shares for this example.
Of this amount we could issue 500 shares to the originators dividing them equally at 100 a piece.
We would then assign what is called a “par value” to each of these shares. Par values are used in accounting and don’t necessarily reflect the true value of the shares.
Once we received our charter from the state our capital structure would look like this:
ABC Company, INC. Common Stock
Authorized Stock – 1,000 shares
Issued and Outstanding – 500 shares
Unissued Stock – 500 shares
A new corporation starts off with common stock only in most occasions. If the company is successful and grows and later on requires additional funding other securities can be introduced.
Next in succession is usually preferred stocks, bonds and in some instances treasury stock. These can all be added to the capital structure of the company and would offer additional investment opportunities for individuals or other companies.
Owning common shares of stock in a corporation gives you equity in that company. This is also known as equity interest with this equity position you have entered into a partnership with the corporate. This partnership is most similar to a limited partnership and comes with its benefits.
Stock Ownership Privilege 1: Voting Rights
Owning a piece of a company comes with voting rights. There are two types of voting privileges a company can offer: Statutory voting and Cumulative voting.
Statutory Voting
This type of voting is the more common of the two. Each shareholder gets one vote per share.
When directors are elected each share is multiplied by the number of seats that will be filled on the board of directors.
So, if 5 vacancies were to be filled, a person holding 100 shares would be given 500 votes (5 x 100). Also the rules of engagement state the votes must be cast in equal amounts for each seat and that no single seat could have over 100 allocated to it. Using this method all but guarantees minority shareholders have no say.
Cumulative Voting
Cumulative voting allows the shareholder one vote per share as well.
Additionally, the process of magnifying votes cast for directors (remember in the above example? 5 x 100) is the same – but with one exception. The votes do not have to be cast in equal amounts for each seat. In this instance the shareholder could cast all votes for one candidate which could potentially result in minority shareholders having representation on the board. This rarely happens.
Stock Ownership Privilege 2: Right to Transfer Shares
A shareholder can transfer ownership of shares to another individual without permission from the corporation. This allows the him to sell, make gifts and assign any portion of his holdings at any given time with 0 restriction.
Stock Ownership Privilege 3: Access to Corporate Books and Records
Shareholders possess the right to review the books and records of corporations. This information can be accessed by accessing quarterly and annual reviews most of which are available online nowadays. A “10-K ” report contains some of this information as well.
Stock Ownership Privilege 4: Dividends When Declared
If the corporation declares a dividend they are required pay it to each shareholder in proportion to their ownership interest. In other words, they are required to pay you a dividend per share and cannot exclude certain groups of shareholders for any reason.
Stock Ownership Privilege V: Preemptive Rights
Simply put, if you are an existing shareholder then you get first right to purchase additional stock.
Thus you get the opportunity to keep your percentage of ownership from getting diluted in case the company decides to issue more shares, with this privilege no extra shares can be issued without giving first rights of purchase to existing owners.
Now that we have established the basic fundamentals of how common share stocks work let’s talk about my favorite type of investment strategy. Dividend ETF Investing.
Dividend ETF Investing
So what is Dividend ETF Investing? If we start with the definition of the acronym ETF that will help. ETF stands for Exchange Traded Fund . Here is further definition on what this type of fund is from our friends at Investopedia:
“An Exchange Traded Fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.”
Source: Investopedia What is an ETF?
“A well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold.”
“An ETF is called an exchange traded fund since it’s traded on an exchange just like stocks. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid when compared to mutual funds.“
Source: Investopedia What is an ETF?
ETF’s based on high yield dividend paying blue chip stocks are my favorite investment vehicle.
Why?
- First of all, ETF’s offer some of the lowest expense ratios in the investment world.
- Secondly, purchasing ETFs in your brokerage account is easy.
- Thirdly, automation is easy once you determine your investment cadence you can take your pick: weekly, monthly, quarterly. You choose the automated frequency.
- ETFs make it easy to invest broadly in what you know, thereby limiting your risk.
- Are you a technology guru? Fine. Invest in a technology based basket. Prefer commodities? There are ETFs for those as well. Want to invest in the U.S.A only? Want to invest internationally? You get it. There are quite literally ETFs for everyone.
By now you are probably wondering how to get started?
There are so many options out there it can be scary!
One way is by opening an account with Vanguard .
Knowing where to invest and what to invest in can be a difficult landscape to navigate. Since there are so many choices many of us are left scratching our heads not knowing what to do.
It’s easy for us to become victims of analysis paralysis in a field with so many choices and so much fine print.
A couple years ago I moved many of our family investments to Vanguard. We hold the majority of our investments with them.
It is well known that Vanguard is trusted in the industry and has some of the lowest expense ratios in the market.
Additionally, opening a retirement fund is easy with Vanguard.
Step 1
Visit Vanguard’s investor portal
Step 2
Select the Personal investors option
Step 3
Select “signup for a new access to set up a new account” then follow the instructions to setup your new account.
Step 4
Select “Advise and Retirement” You will see a myriad of options to help with learning the basics. Click on the link most applicable to you in order to learn more.
Step 5
Choose the account type
- Account types
- IRAs: Roth & traditional
- Individual & joint accounts
- 529 college savings plans
- Annuities
- SEPs, i401(k)s & SIMPLEs
- Vanguard 403(b) Services
Step 6
Choose investment type “Vanguard ETFs”
- Investment products
- Vanguard mutual funds
- Vanguard ETFs
- Other mutual funds
- Stocks & other ETFs
- CDs & bonds
- Cash options
Step 7 Investing strategy and research made easy.
Research and Analyze Funds. I recommend stable Blue Chip Fortune 500 Large Cap Stock ETFs for a long term growth. Make sure you familiarize yourself with a Dividend Investing strategy. You should also choose to have your dividends reinvested to help magnify your growth. Automation by setting up your account to regularly invest in the fund you choose is key.
Step 8 Investing is easy
After researching. Select the fund you want to invest in by clicking on the red “buy” button at the bottom of the page.
Step 9 Investing is still easy
Purchase your selected fund
I recommend an index fund based on the S&P 500 if you are investing for the long term. Look at those gains since the inception of this fund! 16.01%. Additionally the Expense ratio is only a tenth of a percentage so there are virtually no fees. Also remember that past performance is no guarantee of future results. They could be lower or higher.
Step 10 Investing Advice
Keep the fund and don’t sell it, even if there is a financial downturn.
If the market takes a tank and your portfolio value goes down in value you still own the shares. In fact, if the market is horrible- you may want to consider buying more if you have the extra money. While everyone else is panicking and selling you will be getting discounted prices! Remember the old adage. Buy low and sell high!
When the market recovers the value will likely go back up and be worth more than when you first purchased.
Congratulations. With your new brokerage account you can now purchase many types of investments. You now have options.
Whether you fall in love with an individual company and decide to purchase stock direct or you go with a diversification strategy using ETFs the most important thing is getting started. If you are financially stable I urge you to start investing today. Time is your friend.
