There are numerous types of stocks, categorized by company characteristics, size, region, sector, and more. Equipped with an understanding of different stock types, an investor can start building a diversified portfolio. Though all stocks can experience volatility and potentially lose value, holding a mix of different types of shares can mitigate the risk of being too heavily invested in any one category.
An Overview Of Stocks
A stock represents a percentage of ownership in a publicly traded company. So essentially, investors can own small pieces or “shares” of companies.
Generating returns via the stock market can usually happen in one of two ways. First, the value of the stock can increase over time, something known as capital appreciation. The second is through dividend payments, where companies make cash payouts periodically to all owners of that company’s stock. Some people make investments based on a company’s ability to pay consistent dividends, or “income.” Utility and telephone companies often fit into this bucket.
When you own a stock, you hold equity (or ownership) in that company. That’s why stocks are sometimes referred to as equities. Each individual share represents an equal proportion of ownership. Owners of stocks are often referred to as stockholders or shareholders.
Stock Classifications
Here are some of the ways different stocks are categorized:
Common stock represents shares of ownership in a corporation. When an investor receives common shares, they are typically also granted voting rights to the company and can participate in shareholder voting processes — usually one vote for each share.
Preferred stocks make regular dividend payments, but holders of preferred shares often have zero or limited voting rights. If a company becomes financially insolvent however, preferred stockholders have a claim on assets before common shareholders do.
Exchange-traded funds (ETFs) group multiple securities into a single share. For instance, a stock ETF will hold numerous companies, while a bond ETF can hold many individual bonds, whether it’s a collection of Treasurys or high-yield debt. ETFs are popular because of the cheap, instant diversification they offer.
Initial Public Offerings (IPOs) is the process of a private company listing and debuting on a public stock exchange. Investors can buy IPO shares on their first day of trading.
Special Purpose Acquisition Companies (SPACs) are shell companies that go public on the stock exchange, and then try to find a private operating business to purchase.
Real Estate Investment Trusts (REITs) are companies that own and operate real estate, usually focusing on one type of property, such as warehouses, hotels or office buildings. There are pros & cons to investing in REITs. For example, one pro is that they tend to pay consistent dividends. Cons include sensitivity to interest rates, and taxed dividends.
Different Market-Caps
The sizes of stocks are classified by the market capitalization of the company’s publicly traded stock. Market cap is calculated by multiplying the stock price by the total number of outstanding shares.
Generally speaking, larger companies tend to be older, more established, and have greater international exposure — so a higher percentage of a large-cap company’s revenue comes from overseas. Meanwhile, smaller-cap stocks tend to be newer, less established and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.
While the market-caps that determine which companies are small or large can shift, here’s a breakdown that gives some rough parameters.
Micro-Cap: $50 million to $300 million
Small-Cap: $300 million to $2 billion
Mid-Cap: $2 billion to $10 billion
Large-Cap: $10 billion or higher
Mega-Cap: $200 billion or higher
Stock Style Categories
Stocks are also sometimes classified by styles of investing. These categories often have to do with how that company makes money and how the stock is valued. You may often hear this associated when discussing value vs growth stocks.
Value stocks are stocks that are considered to be trading below their actual worth. Investors hope that by buying companies that are priced below their “true” value, they can profit as the gap narrows over time.
Growth stocks are companies that are growing at a fast pace or those that are expected to continue growing at a faster rate than other stocks or competitors. Investors can encounter higher valuations in growth investing.
Stocks By Sector
Additionally, stocks are often grouped by the industry that that company works within. According to the Global Industry Classification Standard (GICS), there are 11 recognized sectors, with numerous industries within those sectors. They include (but are not limited to):
Energy: Energy equipment and services, oil, gas, and consumable fuels
Materials: Chemicals, construction materials, containers and packaging, metals and mining
Industrials: Aerospace and defense, building products, machinery, construction and engineering, electrical equipment, industrial conglomerates
Health Care: Health care equipment and services, pharmaceuticals, biotechnology, life sciences
Financials: Banks, insurance, consumer finance, capital markets, financial services
Information Technology: IT services, software, communications equipment
Communication Services: Diversified telecommunication services, media, entertainment
Utilities: Electric utilities, gas utilities, water utilities, independent power and renewable electricity producers
Real Estate: Real estate management and development, various REITs (retail, residential, office, etc.)
Stocks by Country
Different overseas stocks can be classified by the country or region in which they’re headquartered, even if the company’s operations are global. Individuals looking to invest in international stocks have found that they can do so easily with ETFs, which hold numerous foreign companies within a single share.
Regions that are commonly used in the world of stock investing are:
EAFE is an acronym which stands for Europe, Australasia, and the Far East. Investors may see this used when making investment choices, as the MSCI EAFE is a common index used for international stock funds. These countries are all “developed” nations, which means they have established financial markets, stable political climates, and mature economies.
Emerging-market stocks, which stocks with companies based out of countries whose economies are described as developing. Brazil, Russia, Mexico, China, and India are just a few emerging markets. Emerging markets may be riskier to invest in but may pose an opportunity for high rates of growth.
The Takeaway
There are numerous types of stocks on the market, and it can be important for investors to understand the differences between them. The stock market can be volatile and prone to dramatic declines, but in order to shield themselves from the risks, investors often create diversified portfolios by stocking their holdings through various different stock types.
Diversification is easier to do if an investor understands the different types of stocks that exist in the U.S. equity market. From mega-cap stocks to ETFs to emerging-market companies, there are a myriad of investing opportunities in the equity market.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
When it comes to investing, you have two big decisions to make: What to buy, and where to buy it. As for the former, you have all kinds of choices: cash, bonds, stocks, funds, real estate, and a piece of carpet from Elvis’ jungle room (yes, I have a piece — at least, that’s what the guy who sold it to me said it was). Regarding the latter, most people have just three general options: a traditional retirement account, a Roth retirement account, and a regular investment account. This article is about the second category — how to make the most of your investment accounts.
Stop the Sprawl
If you’re like many investors, you have accounts spread throughout the financial services industry: an IRA or two here, a brokerage account there, perhaps a 401(k) still with a former employer. If you’re married, your spouse probably has a lineup to match. By consolidating as many of those accounts as you can with a single provider, you’ll unclog your mailbox and make tax time easier — and you can even make your portfolio fatter, thanks to these advantages:
Find a better balance. Determining your asset allocation can be tough when you have to look at lots of statements. Rebalancing across several accounts gets tricky; for example, you can’t sell the bonds in your 401(k) to buy stocks in your IRA.
Move money out of mediocre (or worse) accounts. This is especially true of money left in retirement plans from former employers, which often have limited investment choices at high costs.
Get extra services and discounts. Financial companies lure big accounts with lower fees, plus planning services such as a portfolio analysis or access to a Certified Financial Planner.
Find the Best Provider
Choosing a company that deserves the honor of holding your nest egg depends on your style of investing. Here are guidelines based on your investments of choice:
Mutual funds: You can use a single fund family or go with a fund “supermarket” (such as Fidelity, Schwab, or TD Ameritrade) that offers access to thousands of funds from many families. The former is the simplest and possibly the cheapest. The latter offers far more selection.
Funds and individual stocks: Check out the big brokerages that allow you to buy stocks as well as choose form thousands of funds. Look for reasonable stock commissions and a lineup of no-load funds labeled “NTF,” for “no transaction fee.” The Fool’s Broker Center compares the options from several providers.
Stocks and ETFs: Look for the cheapest trades. Many brokerages, including Fidelity, Schwab, and Vanguard, offer free trades on some ETFs.
To Roth or Not to Roth?
By investing after-tax money in a Roth account, you trade a tax break today for one tomorrow, as your earnings and withdrawals will be tax-free. Here’s a rule of thumb: If you’ll be in the same or a higher tax bracket when you retire, go with the Roth.
There is no longer an income limit for converting traditional accounts to Roths. The converted amount gets added to your taxable income in the year you make the move, so if your traditional account is down significantly and you’re contemplating changing it to a Roth, you may want to convert some while the account is down. (Check out this article to hear from several financial planners about why a Roth conversion might make sense, though the option to spread the tax bill over two years was available only in 2010.)
The Right Investments in the Right Accounts
Don’t overlook the art of asset location — deciding which investments to put into which types of accounts. You want to put the most tax-inefficient investments in the accounts that have the most tax advantages. Here’s a summary of what should go where:
Roth accounts: Stocks with a higher potential return (such as small-cap stocks and emerging-marking stocks) and real estate investment trust (REITs).
Traditional tax-deferred accounts: Slower-growth stocks, commodities funds, Treasury inflation-protected securities (TIPS), and bonds (though, given historically low yields, the argument for keeping bonds in an IRA is not as compelling as it used to be).
Taxable, non-tax-advantaged accounts: Low-yield stocks you plan to hold for several years, low-turnover stock funds (such as many index funds and ETFs), municipal bonds, and savings bonds and I bonds.
Those are general guidelines, and can be affected by several factors, such as when you’ll need the money and your ability to pick the stocks that will have the higher return (a difficult task, indeed). For example, keep money that you need before age 59 ½ out of retirement accounts since early withdrawals from an IRA or 401(k) may result in a 10% penalty (though there are exceptions). But they’re a good starting point.
Have a Recommendation?
As for which brokerage, fund company, or online bank to choose, I’ll leave that to you readers. Have any particularly good or bad experiences? Are you happy with whomever’s holding your money? Let us know.
Final note: Don’t forget to get your free Slurpee today! You see, today is my birthday, and in honor of my Womb Liberation Day, 7-11 stores are giving away free 7.11-ounce Slurpees from 11 a.m. to 7 p.m.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Investing in stocks can seem like a daunting task.
There are so many things to consider when it comes to investing, and the stock market is constantly moving.
Stock market investing is a popular option to increase net worth and make money.
Many people are looking for ways to invest their money, with the number of individual investors increasing rapidly in recent years.
This guide covers many important factors for how to invest in stocks for beginners.
Starting out as a newbie trader can be scary and overwhelming… don’t worry, all seasoned traders had to start at the beginning too!
Let’s take away that quell those thoughts and focus on why you want to learn to invest in stocks.
This guide will give you everything you need to know about how to invest in stocks as a beginner investor!
What Are Stocks?
In the most basic form, stocks are a form of investment. When you own a stock, you have a piece of ownership in the company’s equity.
The stock market is a real-time financial market in which investors buy and sell stocks and other securites. The stock market is made up of many companies and individuals who are actively investing in stocks.
Stocks are an excellent way for companies and individuals to invest in a company and receive a share of the company’s profits.
Many of the growth stocks (FAANG stocks) are those who investors want their stock price to increase over time. Thus, increasing their overall portfolio’s net worth.
FAANG Stocks is an acronym for: Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (formerly known as Google).
Some companies like Chevron (CVX) pay out a dividend each quarter to their investors.
There are thousands of stocks available to trade.
What Can You Invest In The Stock Market?
There are many investment opportunities in the financial market, so it is important to be informed about what you can invest in. Below are some of the places where you can invest your money:
Stocks
Bonds
Mutual funds
ETFs
Commodities
Futures
Options
Now, we are going to look at the most common.
Individual stocks
Individual stocks are a type of investment that you can make yourself.
You can choose how many shares of a certain company you want to purchase.
For example, you like Tesla for how they are innovative in the electric car space. You can choose to invest 20 shares of their stock.
As a long-term investor, you want to hold a portfolio of 10-25 stocks. Find a list of beginning stocks to build your portfolio.
Individual stocks can be bought or sold as a way to dip your toe into the stock-trading waters.
As a short-term investor, you are looking to make money as the stock price increases or decreases.
Mutual Funds
Mutual funds are managed portfolios of stocks.
As a result, mutual funds typically have load fees equal to 1% to 3% of the value of the fund.
One of the most popular mutual funds is VTSAX because of its expense ratio is .04%
Mutual funds are a clear choice for most investors because of the simplicity to invest in the market. This can be a good investment for both novice and experienced investors, as they offer decent returns with lower risk.
They tend to rise more slowly than individual stocks and have less potential for high returns. Mutual funds are a great way to diversify your portfolio and gain exposure to a variety of different securities.
All mutual funds must disclose their fees and performance information so that you can make an informed decision about whether or not to invest.
Exchange traded funds (ETFs)
Exchange traded funds (ETFs) are a type of exchange-traded investment product that must register with the SEC and allows investors to pool money and invest in stocks, bonds, or assets that are traded on the US stock exchange.
They are inherently diversified, which reduces your risk.
This is a good option for beginner investors because they offer a large selection of stocks in one go.
ETFs have a lower minimum to start investing, which is a draw for many investors starting out with little funds. Plus there are many different types of ETFs to choose from.
ETFs are similar to mutual funds, but trade more similarly to individual stocks. With ETFs and Index Funds, you can purchase them yourself and may have lower fees.
Why Stock Prices Fluctuate
Stock prices fluctuate because the financial markets are a complex system. There are many factors that can affect the price of a stock,
There are a number of factors that can influence stock prices, including:
Economic indicators like GDP growth, inflation, and unemployment rates
Company earnings reports
The overall health of the economy
Political and social instability
Changes in interest rates
War or natural disasters
Supply and demand,
Actions of the company’s management
Short squeezings like what happened with GME or AMC
The volatility in the stock market is the #1 reason most people stay out of investments. However, on average, the stock market has moved up 8-10% a year.
What is the best thing to invest in as a beginner?
The best thing to invest in as a beginner is your time.
You need to learn how the stock market works. Just like you would get a certification or degree, you should highly consider an investing course.
Learn and devote as much time as you can to investing in stocks.
How To Invest In Stocks For Beginners?
Investing in the stock market can be a great way to make money! If you’re looking for ways to make money or grow net worth, investing in a stock is a smart choice.
With online access and trading being easier now than ever, it can be easier than ever to start buying stocks.
Let’s dig into how to invest in stocks like a pro.
FYI…You should do your own research before investing.
Step #1: Figure out your goals
Figure out your goals to help with setting an investing strategy.
What are you trying to achieve with stock market investing? Is it supplemental income? A certain level of wealth for retirement? Are you looking for short-term or long-term gains?
Once you know what you’re aiming for, it will be easier to find the right stocks and make wise investment decisions.
Your reason to invest in stocks will be different than everyone around you.
Some people want to supplement their weekly income.
Others want to invest in companies for the long term.
My goal is to make weekly income from the stock market. That is my investment strategy for non-retirement accounts.
You need to spend time understanding WHY you want to buy stocks.
Knowing this answer will help you define what type of trader you will be.
Step #2. Decide how you want to invest in the stock market
When you decide to invest in the stock market, you need to choose what you want to invest in.
You can invest in stocks, which are shares of ownership in a company, or you can invest in bonds, which are loans that a company makes. There are also other options like mutual funds and exchange-traded funds (ETFs), which are collections of stocks or bonds.
Also, you can expand this to what types of investments will you have in various retirement or brokerage accounts. For example, you may invest in mutual funds with your 401k, ETFs with your Roth IRA, and stick with individual stocks for your taxable account.
This is a personal decision.
Many people when they are first starting to trade stocks choose to limit purchasing stocks with a limited percentage of their overall portfolio.
Step #3. Are you invest in stocks for the short term or long term?
The buy and hold investor is more comfortable with taking a long-term approach, while the short-term speculator is more focused on the day-to-day price fluctuations.
Once again, this is a personal preference.
One of the most common themes of many investing gurus is, “Remember that stock prices can go down as well as up, so it’s important to stay invested for the long term.”
However, this full-time trader wants to make money on those highs and lows.
Knowing your overall investment horizon will help you decide how much time you plan to hold onto your investments to reach your financial goal.
Also, you can choose different time horizons for different accounts.
Step #4: Determine your investing approach
Passive and active investing are two main approaches to stock market investing.
Passive investing does not involve significant trading and is associated with index funds.
Passive investing is a way to DIY your investments for maximum efficiency over time.
Thus, you would contribute to your investment account on the xx day of the month with $xx amount of money.
This happens with consistency regardless of where the market stands on that day.
You are less warry of where the stock market will go and focused on overtime it will continue to go up.
Active investing takes the opposite approach, hoping to maximize gains by buying and selling more frequently and at specific times.
Active investing is when an investor is actively acquiring, selling, or holding bought stocks.
This could be with day trading or swing trading.
You may hold stocks for less than a day, a few days, or a couple of weeks.
The purpose of having active investing is to make profits.
In the stock market, investors make efforts to increase their net worth over time or to make income off the market.
Step #5: Define your investment strategy
When it comes to investing in the stock market, there are a few key factors you need to take into account: your time horizon, financial goals, risk tolerance, and tax bracket.
Do you want to be an active trader or stick with passive investing? What kind of investor am I?
There is no right or wrong answer as this is a personal preference.
Ultimately, you want returns to be greater than the overall S&P 500 index for the year.
Once you’ve figured these out, you can start focusing on specific investment strategies that will work best for you.
Be aware of any fees or related costs when investing. Fees can take a bite out of your investments, so compare costs and fees.
Step #6: Determine the amount of money willing to lose on stocks.
Trading stocks online is inherently risky.
You want to consider what your “risk tolerance” is. Simply put, how much are you willing to lose in stocks before you want to quit?
The biggest reason most people quit trading stocks is that they do not know their risk tolerance and fail with risk management.
You will lose on trading stocks. The goal is to lose a small amount on some of the trades and gain a greater amount of more of your trades.
How much risk you can reasonably take on given your financial situation?
What are your feelings about risk?
What happens when your favorite stock drops 25%?
Understanding your risk tolerance and how much you are willing to lose will help you keep your losses small.
Start with a small amount of money when investing in stocks. Also, make sure you have enough money saved up so you can handle any losses that may occur.
How to Start Investing in Stocks
There are a variety of ways to start investing in stocks. Some methods include getting a small account balance and then buying shares, creating an investing club with friends, or researching the companies you want to invest in.
Now, that you have determined how and why you want to invest in stocks. Let’s dig into the nitty gritty of how to manage a stock portfolio.
On the other hand, if you don’t invest enough, you could miss out on potential profits. Try starting with an amount you’re comfortable losing if the stock market does go down.
1. Open an investment account
There are a few things you need to do in order to start investing in the stock market.
The first is to open an investment account with a broker or an online brokerage firm.
There are different types of accounts you can open:
Taxable accounts like an individual or joint brokerage
Retirement accounts like IRA or Roth IRA
These are the most basic investment accounts, here is a list of types of investment accounts.
If you plan to hold EFTs or mutual funds, Vanguard is a great place to start.
If you plan to be an active trader, I would look at TD Ameritrade or Fidelity. Be wary of Robinhood or WeBull.
2. Saturate yourself in Stock Market Knowledge
On the simplest level, it can be incredibly easy to begin your investing career with little-to-no knowledge, research, and expertise.
If you have even a remote understanding of stocks, then learn what you need from an easy-to-find YouTube video, followed by watching some of your favorite TV shows to learn more about the market and its secrets.
With that said, you need to be digesting the basics from start to end of getting your first investment started.
As the title reveals, investing can seem intimidating and complicated. Thus, stock market knowledge is invaluable.
3. Consider an Investing Course
A typical investing course would teach how to invest in stocks (and possibly other investments).
As a beginner trader, it is unlikely you will know the full extent of how the stock market works. There are many intricacies you must learn and understand.
Beginners should learn about stock investing basics, such as diversification and investment criteria.
Many investing courses offer a platform on how to make money by trading stocks.
Personally, I highly recommend buying this investing course.
If you choose not to follow my advice, that is fine. Come back when you have lost more money in the stock market than the price of the courses.
I CAN NOT STRESS ENOUGH… how important it is to have a solid foundation and practice in a simulated account before you use your real money.
4. Research the companies you want to invest in
When you’re ready to start investing in stocks, it is important that you do your due diligence and research the companies you want to invest in.
Look for trends and for companies that are in positions to benefit you.
Consider stocks across a wide range of industries, from technology to health care. It’s also important to remember that stock prices can go up or down, so always consider this before making any investment decisions.
5. Choose your stocks, ETFs, or mutual funds
Next, you have to decide what fits your investing strategy. Are you looking to buy:
Stocks
ETFs
Mutual Funds
Regardless of which type of investment you make, you must look for companies that have attractive valuations and growth prospects. In the case of index funds or ETFs, which fund has the companies you find attractive.
Most importantly, you should also take into account the company’s financial health and its prospects for future growth.
Make sure you understand the risks associated with holding a particular stock, including possible price fluctuations and loss of value.
7. Take the Trade
This is the hardest step for most people is to take their first trade.
Thus, why learning to trade stocks is great to learn a simulated account using fake money. Then, move to a LIVE account using your real money.
At some point, in your investing in stocks journey, you must press the buy button.
For many the investment platform may be overwhelming to use, so check out your brokerage’s YouTube videos to help you out.
8: Manage your portfolio
Managing your portfolio is important to keep your investments in good shape.
If you are a long-term investor, diversify your portfolio by investing in different types of investment vehicles and industries.
If you prefer to swing trade or day trade, then you want to make sure you always have cash on hand and are rotating your portfolio to take profit.
Investing can be difficult for beginners who often lack knowledge about the stock market.
It is important to remember to keep investing money and rebalance your portfolio on a regular basis. This will help ensure that you stay on top of your investments and achieve the desired result.
9. Selling Stocks
For most investors, it is harder to sell their stocks than to purchase them. There are a variety of factors for that. But, you must sell your stocks at some time to realize your gain.
Don’t panic if the market crashes or corrects – these events usually don’t last very long and history has shown that the market will eventually rebound. Most people tend to panic sell when stocks are low and FOMO buy when the market is at highs.
When you are ready to sell, aim to achieve a percentage return on your investment.
This will require some focus on your time horizon and the stocks you want to invest in.
Also, you need to consider any taxes that may be owed on the sale of stock.
If you’re new to stock investing, consider using index funds instead of individual stocks to gain broad market exposure.
10. Journal & Analyze your Trades
Journaling is a way of recording the important decisions you make during trading to help yourself remember what happened in your trades. It can be used as a tool for reflection, learning from mistakes, and reviewing your strategy.
Analyzing your trades means looking back on your trading history with the goal of improving it.
This is the most overlooked step of the investing process.
When it comes to buying and selling stocks, journalling what is happening in the market is an important part of being a successful investor.
Stock Market Investing Tips for Beginners
Ask any seasoned trader, and they will have a list of investing tips for beginners.
They have made plenty of trading mistakes they do not want to see newbies do the same thing.
When starting to invest in the stock market, beginner investors often seek out consistent and reliable investments.
This allows them to slowly learn about the stock market and take calculated risks while also earning a return on their investment. Over time, as they gain experience, they can expand their portfolio to include riskier but potentially more rewarding stocks.
1. Invest in Companies That You Understand
An investor should know the company they are investing in and have an idea of what type of return they expect.
When you are starting out, it is best to invest in stocks of companies that are easy to understand and have a proven track record.
Do NOT invest in stocks based on the advice of friends, what you read in the news, or on a whim – these can be risky moves. Be wary of the popular stocks you can find on the Reddit Personal Finance threads.
2. Don’t Time the Market
In the world of investing, there is one rule that no investors should ever break: do not time the market.
By following this rule, you will always be on top of your investments and will be able to reap the rewards.
There are times to buy stocks and sell stocks. This is something you will learn when investing in a high-quality investing course.
As an average investor, trying to time the market will leave you frustrated by your minimal returns or great losses.
3. Avoid Penny Stocks
Penny stocks are the lowest-priced securities on the market, and they don’t offer any significant upside potential to their investors. While you may hit a home run return on some, many penny stocks tend to trend sideways.
The risk is not worth the return.
If you plan to invest in stocks, avoid penny stocks and focus on healthy companies.
4. Consider Buying Fractional Shares
Fractional share investing lets investors buy less than a full share at one time. Many times, you may not be able to afford the price of a full share.
For example, buying a share of Amazon (AMZN) may cost you upwards of $2800 or more. Thus, you can invest a smaller amount with a fractional share.
You would have to check if your brokerage company allows the purchase of fractional shares.
5. Stay the Course
In order to be successful, a trader must stay the course and maintain their focus. By staying focused, they will have less chance of making mistakes that may lead to big losses or overtrading.
When you’re starting out in the stock market, it’s important to be disciplined with your buying. Don’t try to time the market, because you’re likely to fail. Instead, buy shares over time and stay the course.
That way, you’ll be more likely to see a profit in the long run.
6. Avoid Emotional Trading
In order to be successful in the stock market, you have to maintain a level head.
Responding emotionally will only lead to bad decision making. Instead, stay the course and trust your research and analysis.
Know your weaknesses as well as your strengths.
7. Do Your Research
When you’re ready to start investing in the stock market, it is important to do your research so you can make informed decisions.
There are a lot of stocks to choose from, and it can be tempting to invest in them all.
But remember, you don’t want to spread yourself too thin. Invest in stocks that you believe in and that have a good chance of making you money.
8. Build Wealth
Stock market investing is one of the best ways to grow your money over time.
For long-term investing, you buy stocks in companies and hold them for a period of time, typically years. Over time, as the company grows and makes more money, so does your stock. This is one of the most common ways to build wealth over time.
The other way with short-term investing is to consistently take profit and grow your account over time.
Stock investing FAQs
Here is a list of the most common questions and answers on stock investing.
Q: What is the difference between investing and trading?
Trading is buying or selling financial products with the goal of making a profit. This is normally a day trader or swing trader.
Investing, on the other hand, refers to the process of putting money into an investment with the hope that it will grow. Someone who is focused on the long-term.
Q: Do you have to live in the U.S. to open a stock brokerage account?
No, you do not have to live in the U.S. to open a stock brokerage account. You must find a brokerage company in your area of residence abroad.
Q: How much money do I need to start investing?
The very common question of, “How much should you invest in stocks first time?”
It is recommended to start investing with $500 or more. However, you can start with Acorns with as little as $5.
Check out this investor’s story by starting with a small account of $500 and growing it over $35k in less than 6 months.
It is best to grow your account with your growth or profit.
Q: Do I have to pay taxes on the money I earn from stocks?
Yes, you will be required to pay taxes on the money you earn from stocks.
Q: What are the best stocks for beginners to invest in?
The best stocks for beginners to invest in are those that have a history of staying consistently on an uptrend. These companies’ stock prices have typically risen over the course of the year.
Find a list of beginning stocks to build your portfolio.
Q: How do beginners buy stocks?
Above, we outlined this in detail. In order to buy stocks, there are a few different steps that you should follow in order to maximize your chances of success.
The first step is making sure you have an account. Once you have an account, the next step is to decide which stocks you want to invest in. Then, you must buy your stock. Finally, you must decide when you want to sell your stock for a realized gain or loss.
Q: How many stocks should you own?
The best answer is it depends on your investing strategy.
As a short-term investor, you can only manage a smaller number of trades.
As a long-term investor, you need a more well-rounded portfolio. of15-25 stocks.
More likely than not, the short answer is “as many as you can afford.”
Q: What is the best thing to invest in as a beginner?
The best thing to invest in as a beginner is an index fund.
Indexes are great because they diversify across many different types of investments and don’t require much effort on the part of the investor to maintain. Index funds are also less risky than other investments, especially in the beginning stages of an individual’s investing career.
Q: How do we make money?
Traders make money in many ways. They can trade stocks, bonds, futures, and options on equities. They can go long when the market goes up and short when the market goes down.
Traders also use trading systems that are usually automated to manage the trades they make to maximize profit.
Trading is a risky investment and it’s not uncommon for traders to lose money. In order to keep losses small, many traders use the trading strategy based on minimizing risk in order to get the desired return.
Learn how fast you can make money in stocks.
Q: Why is Youtube Option Trading So Popular?
Video on how to trade options is very popular on Youtube. This is because of the high volume of interest on this topic.
For many people, learning options is an advanced strategy that takes more time and knowledge to learn.
This is my favorite youtube option trading channel as well as an overall investing strategy.
Additionally, traders are able to get a much higher return on motion trading versus going long or short on stocks.
Q: What is volume in stocks?
Volume is a measure of the number of shares traded in a given period, usually trading days.
This is an important metric if you plan to exit your trade to know there are enough buyers to buy your stock.
Q: How to invest in penny stocks for beginners?
Penny stocks are shares of a company that typically trade for less than $5 per share, which is also known as penny stock trading.
Investing in penny stocks can be a lot of fun and the highest risk, and there are many ways to get involved. For anyone who is new to the world of investing in penny stocks, it can be intimidating to know where to start.
However, there are a few things that you should keep in mind before diving into the world of penny stocks. One of these is researching what types of companies you want to invest in. Many of these penny stocks are not healthy companies and burning through cash.
It is important to always be careful when investing in penny stocks. Keep in mind that the risk of losing money is high and you should invest only what you are willing to lose.
Q: How to invest in stocks for beginners robinhood?
Robinhood is a stock brokerage company that allows users to invest in stocks without paying any fees. It also provides real-time quotes and charts. To invest, the user must have an account with Robinhood that holds at least $0.
Most major brokerage companies have zero commission fees on trading stocks as well.
Beware, Robinhood is known for stopping to trade various stocks during times of volatility whereas other’s brokers do not.
Q: What is a good price to buy at?
This is a hotly debated question as every investor sees the market from their view.
More often than not, people wonder the best time to buy stocks.
As such, you can read is now a good time to buy stocks?
Ready for Stock Market Investing?
If you are new to investing in stocks, there are a few things you take into consideration before diving into the market.
For starters, it is important to understand how stock markets work. You should also know the difference between a stock and an investment.
Investing in stocks can be a bit complicated, but this guide walked you through the basics of how to invest.
Before you invest in stocks, it is important that you understand your investment strategy. That way, you can make informed decisions about where to put your money and how much risk you are willing to take on.
Most people shy away from learning how to actively trade stocks because of the movies about Wall Street they have watched.
You will get a deeper understanding of investing in stocks the longer you educate yourself on the concept.
Overall, it is wise to diversify your portfolio and don’t put all your eggs in one basket.
So, what is your next move to start investing?
One of the best ways to improve your personal finance situation is to increase your income.
Here are the best investing courses to guide your path. With time and effort, you can start enjoying the lifestyle you want.
Learn how to supplement your daily, weekly, or monthly income with trading so that you can live your best life! This is a lifestyle trading style you need to learn.
Honestly, this course is a must for anyone who invests. You will lose more in the market than you will spend this quality education – guaranteed.
Read my Invest with Teri Review.
Photo Credit:
studentloanplannercourse.com
Learn how to reach a six figure net worth in 5 to 10 years, even if you have a massive amount of student loans.
This beginning investment course will help you pay off debt and start your path to six figures.
After taking a second job as a driver for Amazon to make ends meet, this former teacher pivoted to be a successful stock trader.
Leaving behind the stress of teaching, now he sets his own schedule and makes more money than he ever imagined. He grew his account from $500 to $38000 in 8 months.
Check out this interview.
Know someone else that needs this, too? Then, please share!!
The dividend payout ratio is the ratio of total dividends paid to shareholders relative to the net income of the company. Investors can use the dividend payout formula to gauge what fraction of a company’s net income they could receive in the form of dividends.
While a company will want to retain some earnings to reinvest or pay down debt, the extra profit may be paid out to investors as dividends. As such, investors will want a way to calculate what they can expect if they’re a shareholder.
Understanding Dividends and How They Work
Before calculating potential dividends, investors will want to familiarize themselves with what dividends are, exactly.
A dividend is when a company periodically gives its shareholders a payment in cash, or additional shares of stock, or property. The size of that dividend payment depends on the company’s dividend yield and how many shares you own.
Many investors look to buy stock in companies that pay them as a way to generate regular income in addition to stock price appreciation. A dividend investing strategy is one way many investors look to make money from stocks and build wealth.
Investors can take their dividend payments in cash or reinvest them into their stock holdings. Not all companies pay dividends, and those that do tend to be large, established companies with predictable profits — blue chip stocks, for example. If an investor owns a stock or fund that pays dividends, they can expect a regular payment from that company — typically, each quarter. Some companies may pay dividends more frequently.
Pros and Cons of Investing in Dividend Stocks
Since dividend income can help augment investing returns, investing in dividend stocks — or, stocks that tend to pay higher than average dividends — is popular among some investors. But engaging in a strategy of purchasing dividend stocks has its pros and cons.
As for the advantages, the most obvious is that investors will receive dividend payments and see bigger potential returns from their holdings. Those dividends, in addition to stock appreciation, allow for two potential ways to generate returns. Another benefit is that investors can set up their dividends to automatically reinvest, meaning that they’re holdings grow with no extra effort.
Potential drawbacks, however, are that dividend stocks may generate a higher tax burden, depending on the specific stocks. You’ll need to look more closely at whether your dividends are “ordinary” or “qualified,” and dig a little deeper into qualified dividend tax rates to get a better idea of what you might end up owing.
Also, stocks that pay higher dividends often don’t see as much appreciation as some other growth stocks — but investors do reap the benefit of a steady, if small, payout.
What Is the Dividend Payout Ratio?
The dividend payout ratio expresses the percentage of income that a company pays to shareholders. Ratios vary widely by company. Some may pay out all of their net income, while others may hang on to a portion to reinvest in the company or pay off debt.
Generally speaking, a healthy range for payout ratios is from 35% to 55%. There are certain circumstances in which a lower ratio might make sense for a company. For example, a relatively young company that plans to expand might reinvest a larger portion of its profits into growth.
How to Calculate a Dividend Payout
Calculating your potential dividend payout is fairly simple: It requires that you know the dividend payout ratio formula, and simply plug in some numbers.
Dividend Payout Ratio Formula
The simplest dividend payout ratio formula divides the total annual dividends by net income, or earnings, from the same period. The equation looks like this:
Dividend payout ratio = Dividends paid / Net income
Again, figuring out the payout ratio is only a matter of doing some plug-and-play with the appropriate figures.
Dividend Payout Ratio Calculation Example
Here’s an example of how to calculate dividend payout using the dividend payout ratio.
If a company reported net income of $120 million and paid out a total of $50 million in dividends, the dividend payout ratio would be $50 million/$120 million, or about 42%. That means that the company retained about 58% of its profits.
Or, to plug those numbers into the formula, it would look like this:
~42% = 50,000,000 / 120,000,000
An alternative dividend payout ratio calculation uses dividends per share and earnings per share as variables:
Dividend payout ratio = Dividends per share / Earnings per share
A third formula uses retention ratio, which tells us how much of a company’s profits are being retained for reinvestment, rather than paid out in dividends.
Dividend payout ratio = 1 – Retention ratio
You can determine the retention ratio with the following formula:
Retention ratio = (Net income – Dividends paid) / Net income
You can find figures including total dividends paid and a company’s net income in a company’s financial statements, such as its earnings report or annual report.
Get up to $1,000 in stock when you fund a new account.**
Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.
**Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Why Does the Dividend Payout Ratio Matter?
Dividend stocks often play an important part in individuals’ investment strategies. As noted, dividends are one of the primary ways stock holdings earn money — investors also earn money on stocks by selling holdings that have appreciated in value.
Investors may choose to automatically reinvest the dividends they do earn, increasing the size of their holdings, and therefore, potentially earning even more dividends over time. This can often be done through a dividend reinvestment plan.
But it’s important to be able to know what the ratio results are telling you so that you can make wise decisions related to your investments.
Interpreting Dividend Payout Ratio Results
Learning how to calculate dividend payout and use the payout ratio is one thing. But what does it all mean? What is it telling you?
On a basic level, the dividend payout ratio can help investors gain insight into the health of dividend stocks. For instance, a higher ratio indicates that a company is paying out more of its profits in dividends, and this may be a sign that it is established, or not necessarily looking to expand in the near future. It may also indicate that a company isn’t investing enough in its own growth.
Lower ratios may mean a company is retaining a higher percentage of its earnings to expand its operations or fund research and development, for example. These stocks may still be a good bet, since these activities may help drive up share price or lead to large dividends in the future.
Dividend Sustainability
Paying attention to trends in dividend payout ratios can help you determine a dividend’s sustainability — or, the likelihood a company will continue to pay dividends of a certain size in the future. For example, a steadily rising dividend payout ratio could indicate that a company is on a stable path, while a sudden jump to a higher payout ratio might be harder for a company to sustain.
That’s knowledge that may be put to use when trying to manage your portfolio.
It’s also worth noting that there can be dividend payout ratios that are more than 100%. That means the company is paying out more money in dividends than it is earning — something no company can do for very long. While they may ride out a bad year, they may also have to lower their dividends, or suspend them entirely, if this trend continues.
Dividend Payout Ratio vs Dividend Yield
The dividend yield is the ratio of a stock’s dividend per share to the stock’s current price:
Dividend yield = Annual dividend per share/Current stock price
As an example, if a stock costs $100 and pays an annual dividend of $7 the dividend yield will be $7/$100, or 7%.
Like the dividend payout ratio, dividend yield is a metric investors can use when comparing stocks to understand the health of a company. For example, high dividend yields might be a result of a quickly dropping share price, which may indicate that a stock is in trouble. Dividend yield can also help investors understand whether a stock is valued well and whether it will meet the investor’s income needs or fit with their overall investing strategy.
Dividend Payout Ratio vs Retention Ratio
As discussed, the retention ratio tells investors how much of a company’s profits are being retained to be reinvested, rather than used to pay investors dividends. The formula looks like this:
Retention ratio = (Net income – Dividends paid) / Net income
If we use the same numbers from our initial example, the formula would look like this:
~58% = (120,000,000 – 50,000,000) / 120,000,000
This can be used much in the same way that the dividend payout ratio can, as it calculates the other side of the equation — how much a company is retaining, rather than paying out. In other words, if you can find one, you can easily find the other.
The Takeaway
The dividend payout ratio is a calculation that tells investors how much a company pays out in dividends to investors. Since dividend stocks can be an important component of an investment strategy, this can be useful information to investors who are trying to fine-tune their strategies, especially since different types of dividends have different tax implications.
In addition, the dividend payout ratio can help investors evaluate stocks that pay dividends, often providing clues about company health and long-term sustainability. It’s different from other ratios, like the retention ratio or the dividend yield.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
FAQ
How do you calculate your dividend payment?
To calculate your exact dividend payment, you’d need to know how many shares you own, a company’s net income, and the number of total outstanding shares. From there, you can calculate dividend per share, and multiply it by the number of shares you own.
Are dividends taxed?
Yes, dividends are taxed, as the IRS considers them a form of income. There may be some slight differences in how they’re taxed, but even if you reinvest your dividend income back into a company, you’ll still generate a tax liability by receiving dividend income.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. SOIN0423015
Long, long ago, in a mystical forest with good Wi-Fi, Goldilocks opened an investing account with $3,000 to invest.
At first, she considered pouring more money into her retirement accounts (which only holds mutual fund investments). But her Roth IRA was already maxed out for the year. Moreover, she knew that she would need this money sooner than age 65.
“Too cold!” she said.
Next, she considered investing in individual stocks. But even though she’d done her due diligence, she knew that investing in individual securities can be very risky. She didn’t need to become a millionaire overnight – she just wanted to make enough money to buy a cottage in a few years.
“Too hot!” she said.
Finally, she began browsing ETFs. ETFs are generally more stable, diverse, and safe investments than individual stocks, but they’re also more accessible than your retirement account.
“Juuuuust right!” she said aloud.
10 years later, Goldilocks’ investment had paid off – thanks to a steady 10% APY, her $3,000 investment had become nearly $8,000, so she was finally able to pay restitution and legal fees to the family of bears down the way.
Thanks to inherent diversity and steady returns, ETFs are a great place to stash a few grand to help you save for a big expense years or decades down the line.
What’s Ahead:
Large-cap stock ETFs
Large-cap ETFs typically bundle together blue-chip stocks or even an entire index, providing steady, sizeable returns. Warren Buffet once famously said:
“I just think that the best thing to do is buy 90% in S&P 500 index fund.”
So I’ve included two such options on the list.
You’ll also see a lot of Vanguard funds on this list because, well, they’re just awesome all the way around. Vanguard funds are extremely popular among investors because they combine industry-leading returns with incredibly low expense ratios.
ETF
Symbol
Fund info
Expense ratio
Schwab US Large-Cap Growth ETF™
SCHG
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index.
0.04%
SPDR S&P 500 ETF
SPY
The SPDR® S&P 500® ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”).
0.0945%
Vanguard S&P 500 ETF
VOO
The Vanguard S&P 500 ETF invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
0.03%
Vanguard Russell 1000 Growth ETF
VONG
The investment seeks to track the performance of the Russell 1000® Growth Index. The index is designed to measure the performance of large-capitalization growth stocks in the United States.
0.08%
Mid-cap stock ETFs
Goldilocks’ choice – mid-cap ETFs – bundle together companies that have an exciting growth curve before them, but are established enough not to fold overnight.
If you can tolerate a little more risk in exchange for higher potential returns than an index fund, consider these top picks:
ETF
Symbol
Fund info
Expense ratio
Vanguard Mid-Cap Growth ETF
VOT
VOT seeks to track the performance of the CRSP US Mid Cap Growth Index, which measures the investment return of mid-capitalization growth stocks.
0.07%
iShares Core S&P Mid-Cap ETF
IJF
IJF seeks to track the investment results of an index composed of mid-capitalization U.S. equities.
0.05%
Vanguard Mid-Cap ETF
VO
VO seeks to track the performance of the CRSP US Mid Cap Index, which measures the investment return of mid-capitalization stocks.
0.04%
Schwab U.S. Mid-Cap ETF
SCHM
SCHM’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Mid-Cap Total Stock Market Index.
0.04%
Small-cap stock ETFs
If you’ve looked at your asset portfolio recently and thought “hmm… needs a little more spice,” then a small-cap ETF might add just the right amount of kick.
These ETFs track small companies with big potential, so they present higher risk but higher potential reward than large- or mid-cap ETFs.
ETF
Symbol
Fund info
Expense ratio
Vanguard S&P Small-Cap 600 Growth ETF
VIOG
VIOG employs an indexing investment approach designed to track the performance of the S&P SmallCap 600® Growth Index, which represents the growth companies, as determined by the index sponsor, of the S&P SmallCap 600 Index.
0.15%
Vanguard Small-Cap ETF
VB
VB seeks to track the performance of the CRSP US Small Cap Index, which measures the investment return of small-capitalization stocks.
0.05%
iShares Core S&P Small-Cap ETF
IJR
IJR seeks to track the investment results of an index composed of small-capitalization U.S. equities.
0.06%
Schwab U.S. Small-Cap ETF
SCHA
SCHA’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index.
0.04%
International stock ETFs
ETF
Symbol
Fund info
Expense ratio
Vanguard Emerging Markets ETF
VWO
VWO invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa.
0.10%
Vanguard Total International Stock ETF
VXUS
VXUS seeks to track the performance of the FTSE Global All Cap ex US Index, which measures the investment return of stocks issued by companies located outside the United States.
0.08%
SPDR® MSCI EAFE Fossil Fuel Free ETF
EFAX
EFAX seeks to offer climate-conscious investors exposure to international equities while limiting exposure to companies owning fossil fuel reserves.
0.20%
Vanguard FTSE Developed Markets ETF
VEA
VEA provides a convenient way to match the performance of a diversified group of stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region.
0.05%
Fixed income ETFs
ETF
Symbol
Fund info
Expense ratio
iShares Core U.S. Aggregate Bond ETF
AGG
AGG seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.
0.05%
Vanguard Total Bond Market ETF
BND
BND’s investment objective is to seek to track the performance of a broad, market-weighted bond index.
0.035%
Vanguard Intermediate-Term Corporate Bond ETF
VCIT
VCIT seeks to provide a moderate and sustainable level of current income by investing primarily in high-quality (investment-grade) corporate bonds.
0.05%
Schwab 1-5 Year Corporate Bond ETF
SCHJ
SCHJ’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the short-term U.S. corporate bond market.
0.05%
What does large-cap, mid-cap, etc. mean?
To start, “cap” refers to market capitalization, or the total value of a company’s shares on the market. For example, if a company has 1 million shares on the market valued at $10 a pop, their market cap would be $10 million.
Large-cap ETFs are comprised of companies each with a market cap of $10 billion or higher. The Vanguard Mega Cap ETF (MGC), for example, contains around 250 of the biggest companies in the USA, from Amazon to Apple. Since they’re often full of blue-chip stocks that provide slow-but-steady returns, large-cap ETFs are considered a safe, long-term investment.
Mid-cap ETFsare comprised of companies each with a market cap in the $2 to $10 billion range. All ETFs are designed to succeed and make money, so mid-cap ETFs are filled with midsized companies that are in the middle of their “growth curve,” so to speak – they’re high-performing, high-potential companies that may become the next blue-chip, so mid-cap ETFs balance risk and reward.
Small-cap ETFsare comprised of companies each with a market cap of “just” $300 million to $2 billion. Fund managers who design small-cap ETFs cast a wide net, aiming to scoop up “the next big thing.” As a result, these ETFs have higher growth potential than most ETFs, but also steeper downside if the smaller companies within end up folding.
International ETFsare, as the name so subtly hints, full of non-U.S. stocks and securities. There are country-specific ETFs, foreign industry ETFs (think non-U.S. automotive stocks), and even ETFs representing emerging markets like sub-Saharan Africa and Brazil.
Fixed income ETFs, aka bond ETFs, give you access to diverse bond investments. For the uninitiated, bonds are like loans you make to companies or governments that they pay back with interest. You can read more about bonds here, but the bottom line is this: fixed-income ETFs provide steady income in the form of dividends, so they’re a good choice if you want a safe investment that gives you a paycheck!
Read more:How To Invest In ETFs
Which type of ETF is right for you?
Well, it depends on both your goals and your risk tolerance.
If you can tolerate some risk in your portfolio, and want your ETF investment to pay off sooner than later (within five years), you may want to consider small-cap and mid-cap ETFs. They’re riskier, but have higher upside potential.
If you’re looking for a safer investment that will multiply your money over a longer horizon (5+ years), a large-cap ETF is probably a fit.
If you’d like your ETF investment to provide a trickle of cashback each month, fixed income ETFs are probably your best bet.
And finally, if you don’t mind doing a little research or believe strongly in the economic performance of a foreign market, you’ll be a fan of international ETFs.
Read more: How To Determine Your Investing Risk Tolerance
About our criteria
With hundreds of commission-free ETFs available, how did these become the winners?
To make this list, ETFs had to impress in all of the following categories:
Earnings potential.Naturally, the first thing looked at was the ETF’s performance over the past five years. A good sign of a healthy ETF is how quickly it bounced back in Q3 2020 after the market panic surrounding the COVID-19 pandemic. Springboarding back and surpassing Q1 levels are a sign of investor confidence, and helped solidify the ETF’s place on this list.
Expense ratio.Next, I looked at the ETF’s expense ratio. Your expense ratio is the percentage of your investment you pay to the fund manager for having shares of the ETF. Although measured in fractions of a percent, expense ratios make a difference – 0.80% of $10,000 is $80 and 0.04% is just $4, so ETFs with an expense ratio below 0.20% were favored.
Fund reputation. You’ll see a lot of repeated names on this list because funds like Schwab, BlackRock (iShares), and especially Vanguard have a proven track record of building well-crafted, reliable ETFs with low expense ratios. Fund reputation matters in the long run because big funds attract big money, which helps to generate higher returns for you!
Solid fundamentals.ETFs aren’t just random grab bags of stock and securities – each one is a carefully curated list, with selection criteria driven by both AI and human logic. There are some wacky and unique ETFs out there – such as Millennial ETFs and Space ETFs – and I’ll cover more of them in an upcoming piece. But this list isn’t for the experimental, exciting stuff – it’s for safe, dare I say boring, places to stash and multiply your savings.
Conscious investing.Finally, this was more of a small thing in the back of my mind, but I wanted each ETF on this list to score average or above average for “conscious capitalism.” No fossil fuels, no sin stocks (learn more about sin stocks here) – and not just because it’s not the way of the future, but because investments in conscious capitalism generally outperform “sinful” investments in the long term.
Commission-free ETFs solve a big problem for young investors
Commission-free ETFs aren’t just great because they’re cheap – they actually solve a pretty serious problem plaguing young ETF investors.
You see, ETFs have heftier commissions and trade fees than stocks because ETFs can be resource-intensive to create. Let’s say you’re a fund manager and you have an idea for an ETF. The process to get your ETF approved by the SEC isn’t unlike getting your new drug approved by the FDA; you have to research a ton, understand the risks, and propose your ETF to the government.
Once your ETF is approved and available, you probably want some additional compensation for your work beyond just capital gains from your ETF.
You don’t want to charge a high percentage trade fee, because big-ticket investors will be turned off. So, instead, you charge a $10 to $20 fee per trade of your ETF.
Big-ticket investors who drop $50,000 on a trade couldn’t care less about a $20 fee, since that represents just 0.04% of their investment. But if you’re a young investor, investing maybe $50 to $100 out of each monthly paycheck, a $20 per-trade fee is way too high – basically pricing us out of ETF investing. 🙁
Thankfully, many brokerages have realized that their per-trade fees are too high for young investors and have eliminated commissions on trades of certain ETFs. At first, funds like Vanguard and Fidelity only let you trade commission-free on their own platforms, but now, they’ve expanded their commission-free goodness to wide platforms like J. P. Morgan Self-Directed Investing.
And it’s not just the junk ETFs that get traded commission-free – in fact, it’s often quite the opposite. Firms like Vanguard and Fidelity will let you trade their most successful ETFs for free – presumably because they don’t really need the commission.
Disclosure – INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Summary
If you’re looking for an investment vehicle falling somewhere between your boring retirement account and your exciting individual stock purchases, ETFs are an excellent choice. And now that the big funds are waiving commissions on their top-performing ETFs, there’s never been a better time to dive into the world of ETFs and inject some low- to mid-risk into your portfolio.
ETFs are also an excellent investment if you’re looking to multiply your money and cash out within 2 to 10 years. You can even leave your ETF investment until retirement, if you want, so it has plenty of time to multiply under compound interest.
Not all ETFs are made the same, however – and the SEC has approved some stinkers over the years, for sure. These ETFs, on the other hand, are universally considered top-ranked and well-supported within the investor community – and are a superb place to start.
By Jason Price2 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited November 18, 2017.
I recently received a financial advertisement in the mail that mentioned some retirement investment risks I thought were pretty good to keep in mind. Along with each were some practical tips in mitigating the risks, or ways to make them less severe.
Before discussing a few of these risks, lets first look at the nature of risks. Risks are interesting in that that they haven’t occurred yet. But, they are potential issues that could occur in the future. As a software project manager during my day job, I know the key to good risk management is identifying risks well before they are realized, or actually become issues. If you can identify them early you can develop mitigation strategies to keep them from turning into big problems.
What’s the worst that could occur if you don’t shut down risks? Just look at people who have lost their retirement money in the stock market in the recent downturn. Or, what about the people that chose to invest in the wrong company, or with the wrong person? Still, some have created risk to their future gains by not risking enough in the way they choose their investment allocations.
Market Volatility
This particular risk is obvious. Over time the market has ups and downs. Obviously, we’ve seen the downside in the last year or so. Unfortunately, there is just no way to predict the highs and lows of the stock market. Certainly, we’d all have own our own tropical island if that were possible. 🙂
Note: you can see the changes in the market over a number of years with this interactive S&P 500 volatility chart at Yahoo finance.
Probably the best way to reduce the impacts of market volatility is to have the right asset allocation for your particular situation. Finding an asset allocation involves identifying investment classes based on a number of criteria. This criteria may include (but not limited to) how much time you have until you retire, goals, or what you’ll be doing in the future, and certainly, your level of risk tolerance.
Inflation
Inflation is basically when everything increases in price and your money buys fewer goods, or loses purchasing power. In other words, inflation makes your future retirement income less valuable, so you want to invest in something that will more than offset inflation.
Inflationrate.com provides a pretty cool calculator to see the effects of inflation across time. The example they use is alarming: From December 1957 through December 2007 the calculator will tell you that inflation was 639.56%. Something that cost $1 in December 1957 would cost $1+ ($1 x 6.3956)= $7.40. Ouch!
In order to combat inflation you commonly here the recommendation of investing in growth stocks or growth stock mutual funds to earn higher returns. Obviously, there is a trade off to keep in mind with such investments. The more you invest in growth assets, the more risk you must be able to tolerate because these types of investments are more volatile.
Investment Integrity
We’ve all heard about integrity issues in the last year when it comes to people managing investments or with individual companies. This is definitely a risk you have to keep on the radar screen as unfortunately, the world will always have greed in it. Whether it’s an individual who is dishonest with the management of peoples’ resources, or a company that is taking short cuts to try to become more profitable, there will sadly be investments wiped out when they fall.
Certainly, there are more and more controls being put in place to deal with such risks, but you have to remember you’re still the overarching manager of your money, so it’s your responsibility to mitigate this risk from occurring.
How do you do that? Well, an important and timeless guideline in investing, never putting your eggs in one basket, still applies. Don’t take your entire retirement assets and place them in the invested trust of one or a few corporations. Spread the risk and invest using mutual funds or in many companies of different types and industries.
I thought this recent Crown Financial Ministries devotional was quite fitting for this subject:
When investing, there are no sure things; so the principle of diversification is essential to long-term stability. Divide your investment money into several parts and don’t risk it all in one place. Diversify not only in different investments but also into differing areas of the economy.
Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”(Ecclesiastes 11:2 NASB).
In regards, to avoiding risks with investment managers, do your homework and research before signing up to work with someone. Find an advisor from a trusted source through your church community, or from friends who have worked with the person for several years.
What are some other forms of investment risks and how would you recommend mitigating them?
That’s the takeaway from a recent Morningstar analysis, which reported in on a seeming contradiction in stock prices. The market as a whole, Morningstar writes, is expensive. But those prices are a bargain compared to what the underlying companies generally should cost.
At threshold level, stock prices have gone way, way up over the last several years. As Morningstar writes, its U.S. Market Index is up about 8.6% in 2023 alone and 16.2% over the recent low last October. That’s despite 2022’s inflation, which has largely but not yet completely abated, and ongoing concerns of a potential recession in late 2023.
“We still think the U.S. equity market looks expensive and has been getting more expensive since the start of the year,” wrote Morningstar while quoting Jim Masturzo, chief investment officer of multi-asset strategies at Research Affiliates. “The market is holding up well given the macroeconomic environment.”
So where can investors find the best bargains?
For hands-on help strategizing your investments, consider matching for free with a vetted financial advisor.
For the Best Bargains, Look to Value Stocks
Look at the S&P 500, and you’ll also see lofty share prices. From an October 2022 low around 3,500, the S&P 500 is now back to hovering near 4,200 points. Even if you disregard the March, 2020 low as an aberration, this is a huge gain from the S&P 500’s pre-Covid value of around 3,300 points.
So the stock market is doing well, with high prices that are going steadily up. Much of that, writes Morningstar, is down to technology stocks that have posted huge gains in recent months and years. These are “the big technology stocks that dominate the weightings in broad market indexes, such as Apple (AAPL) — up 35% in 2023 — and Alphabet (GOOGL) — is up 39% so far this year. That, say some strategists, has left large growth stocks particularly expensive.”
Expensive is one word for it. At time of writing Apple traded for $177 and Alphabet for $123. Stocks like Tesla (TSLA) and Meta (META) traded for $197 and $263 per share, respectively. Although, to be fair, none of these compare with the likes of Chipotle Mexican Grill (CMG), which has a current share price of $2,064.
Yet despite these high prices, Morningstar feels that now is still a good time to buy. “[B]y Morningstar’s fair value estimate measures, stocks are actually undervalued by more than 9%, with value stocks looking particularly cheap,” Morning star writes. “That market discount, however, has been narrowing significantly since the October low.”
The key to this analysis is that term “value stocks.” Morningstar sees a market rich in value stocks.
Stocks are considered value stocks when they have a low share price compared with the underlying value of the company. For example, if you poured over the books of a company and decided that it was fairly worth about $20 per share, but it is currently trading for $15 per share, you would consider it a value stock.
Value stocks are generally considered a good buy for long term investors. Historically the market has been good at correcting a company’s share price to its fundamental value, a process known as “market efficiency.” Investors who buy a stock trading below the company’s fair valuation can generally expect that share price to rise over time to the level of its fundamental value. (some economists have criticized the market efficiency theory in the era of soaring tech sector valuations.)
The tricky part is figuring out that company’s underlying value.
How to Analyze a Company’s Underlying Value in Search of Bargain Stocks
Investors use a number of different metrics to decide what a company should trade for, including indicators like volatility (lower volatility tends to mean stronger value), dividends (higher dividends show stronger cash flow) and peer/competitor share price (higher priced competitors suggest a valuable industry). However the most common indicator that investors reach for is a company’s Price-to-Earnings Ratio, or P/E ratio.
A P/E ratio measures a company’s share price against its total earnings per share. For example, say that a company trades for $40 per share. It has released 1 million shares of stock total and it had $20 million in total earnings last year, giving it earnings of $20 per share. The company’s P/E ratio would be 2 ($40/$20).
The price to earnings ratio shows how much value you get for every dollar invested in a given stock. In our case above, for example, you pay $2 in share price for every $1 of company earnings. Or, to put it another way, every $2 that you invest in the company buys you $1 of value.
In general, across the market, 16 is considered an average price-to-earnings ratio. This means that with an average investment you pay $16 for every $1 of underlying earnings. Companies with low P/E ratio, whether compared with peer industries or the market at large, are generally considered value stocks. It’s likely that other investors will bid the price of this asset up because it offers better value than comparable investments.
All of which brings us back to Morningstar’s analysis.
As we noted above, Morningstar sees a market rich in value stocks. This is due to several different factors, including both standard P/E ratios and an adjusted form of this analysis known as the Cyclically Adjusted P/E, or “CAPE,” ratio. A CAPE analysis uses a company’s inflation-adjusted earnings over the past 10 years, rather than the firm’s most recent earnings report, in order to try and eliminated short-term anomalies in the business cycle. With both a standard P/E and a CAPE analysis, Morningstar writes, “fair value suggests stocks are undervalued.”
“Up 8.6% this year to date, the Morningstar U.S. Market Index sports a price/earnings multiple of 19.8 times based on trailing 12-month earnings,” Morningstar writes. “That compares with a P/E of 24.2 times at its peak in late 2021 and 17 times at the low in mid-October 2022… [And] value stocks are cheap relative to growth stocks [with] the materials sector trading at a P/E of 15 compared with an average closer to 18. Energy stocks are trading at a P/E of 7 compared with an average of 16.”
This is even true outside of the United States, where emerging markets are trading at a P/E ratio of 13.5.
Now, it’s important to understand that investors still do need to look for value. The large cap stocks out there, especially in technology, are expensive. “They are very high historically and relative to interest rates, liquidity, and inflation,” Morningstar’s analysis notes. What this means, in a nutshell, is that technology stocks have quite possibly met or exceeded their fundamental value. These companies have commanded a lot of growth, which means there’s not much of a gap left between their share price and their value.
The high-priced stocks that are demanding hundreds of dollars per share may grab headlines, but they aren’t necessarily driving the market’s value. Instead, look for the stocks with strong business fundamentals and a low P/E ratio.
Because despite the strong market, they’re out there, and now might be a great time to buy them.
The Bottom Line
A recent Morningstar analysis suggests that now might be a great time to buy into the market. Even though prices are high, they’re often low relative to the underlying value of companies at large, making this a strong moment for would-be investors.
Fundamentals Investing Tips
A P/E ratio is part of what’s known as “fundamental analysis.” This means that you look at the underlying company’s strengths and weaknesses to look for good investment opportunities. It’s an essential part of any long-term investor’s toolkit.
You know what else is an essential part of your toolkit? Good advice. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
Generally speaking, value stocks are shares of companies that have fallen out of favor and are valued less than their actual worth. Growth stocks are shares of companies that demonstrate a strong potential to increase revenue or earnings thereby ramping up their stock price. The terms value and growth refer to both two categories of stocks and two investment “styles” or approaches of investing in stock.
Each style has pros and cons. When value investing, investors can buy shares or fractional shares of a company that has strong fundamentals at bargain prices. However, investors must be careful not to fall in a “value trap”—buying stocks that appear cheap, but are actually trading at a discount due to poor fundamentals.
What Are Value Stocks?
When investors hunt for value stocks, they are looking for stocks that are relatively cheap, unfashionable, or that they believe aren’t receiving a fair market valuation. Value investors try to identify value stocks by examining quarterly and annual financial statements and comparing what they see to the price the stock is getting on the market.
Investors will also look at a number of valuation metrics to determine whether the stock is cheap relative to its own trading history, its industry, and other benchmarks, such as the S&P 500 index.
For example, investors often look at price-to-earnings (P/E) ratio, which is the ratio of price per share over earnings per share. Some experts say that a value stock’s P/E should be 40% less than the stock’s highest P/E in the previous five years.
Investors may also look at price-to-book, which is the price per share over book value per share. A stock’s book value is a company’s total assets minus its liability and provides an estimate of a company’s value if it were liquidated.
Value investors are hoping to buy a quality stock when its price is in a temporary lull, holding it until the market corrects and the stock price goes up to a point that better reflects the underlying value of the company.
What Could Make a Stock Undervalued?
There are a number of reasons that a stock could be undervalued.
• A stock could be cyclical, meaning it’s tied to the movements of the market. While the company itself might be strong, market fluctuations may temporarily cause its price to dip.
Recommended: Cyclical vs Non Cyclical Stocks
• An entire sector of the market could be out of favor, causing the price of a specific stock to dip. For example, a pharmaceutical company with an effective new drug might be priced low if the health care sector is generally on the outs with investors.
• Bad press could cause share prices to drop.
• Companies can simply be overlooked by investors looking in a different direction.
What Are Growth Stocks?
Growth stocks are shares of companies that demonstrate the potential for high earnings or sales, often rising faster than the rest of the market. These companies tend to reinvest their earnings back into their business to continue their company’s growth spurt, as opposed to paying out dividends to shareholders. Growth investors are betting that a company that’s growing fast now, will continue to grow quickly in the future.
To spot growth stocks, investors look for companies that are not only expanding rapidly but may be leaders in their industry. For example, a company may have developed a new technology that gives it a competitive edge over similar companies.
There are also a number of metrics growth investors may examine to help them identify growth stocks. First, investors may look at price-to-sales (P/S), or price per share over sales per share. Not all growth companies are profitable, and P/S allows investors to see how quickly a company is expanding without factoring in its costs.
Investors may also look at price-to-earnings growth (PEG), which is P/E over projected earnings growth. A PEG of 1 or more typically suggests that investors are overvaluing a stock, while PEG of less than one may mean the stock is relatively cheap. PEG is a useful metric for investors who want to consider both value and growth investing.
Investors jumping into growth stocks may be buying a stock that is already valued relatively high. In doing so, they run the risk of losing a potentially significant amount of money if an unforeseen event causes prices to tumble in the future.
How Are Growth and Value Strategies Similar?
While growth and value investing are two different investment strategies, distinctions between the two are not hard and fast — there can be quite a bit of overlap. Investors may see that stocks listed in a growth fund are also listed in a value fund depending on the criteria used to choose the stock.
What’s more, growth stocks may evolve into value stocks, and value stocks can become growth stocks. For example, say a small technology company develops a new product that attracts a lot of investor attention and it starts to use that capital to grow its business more quickly, shifting from value to growth.
Investors practicing growth and value strategies also have the same end goal in mind: They want to buy stocks when they are relatively cheap and sell them again when prices have gone up. Value investors are simply looking to do this with companies that are already on solid financial footing, and hopefully, see stock price appreciation should rise as a result. And growth investors are looking for companies with a lot of potential whose stock price will hopefully jump in the future.
Using Growth and Value Strategies Together
The stock market goes through natural cycles during which either growth or value stocks will be up. Investors who want to capture the potential benefits of each may choose to employ both strategies over the long term. Doing so may add diversity to an investor’s portfolio and head off the temptation to chase trends if one style pulls ahead of the other.
Investors who don’t want to analyze individual stocks for growth or value potential can access these strategies through growth or value funds. Because of the cyclical nature of growth and value investing, investors may want to keep a close eye on their portfolios to ensure they stay balanced — and consider rebalancing their portfolio if market cycles shift their asset allocation.
The Takeaway
Growth and value are different strategies for investing in stocks. Investing in growth stocks is considered a bit riskier, though it also may provide potentially higher returns than value investing. That said, growth stocks have not always outperformed value stocks.
As a result, some investors may choose to build a diversified portfolio that includes each style so they have a better chance of reaping benefits when one is outperforming the other.
Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions. SOIN0523037
This post is an illustrated, pared-down version of my recent “Inflation, Explained” podcast episode.
It was created as a simple, easy-to-digest guide to help you understand the current inflationary environment in the US.
Ready? Let’s dive in!
What is inflation?
Simple definition: too much money chasing too few goods.
– a.k.a. this: –
When Does it Happen?
When the growth of the money supply outpaces the growth of the economy
The money supply grows from…
– Printing & issuance of new money
– The government loaning money into banking system by purchasing government bonds
– The government deciding to legally devalue currency*
(*The U.S. dollar has only been deliberately devalued once, in 1933-1934)
When demand outpaces supply, (aka too much money chasing too few goods) which causes prices to rise.
What this can look like…
– Higher demand for goods that can’t quickly or easily increase in supply. (More on this in a minute.)
– Manufacturers and retailers facing higher production costs due to external factors driving up the cost of raw materials or manufacturing. These higher costs get passed down to the end consumer.
Fun fact!
There’s also something called the “wage price spiral.”
It takes place when…
1. Prices begin to rise,
2. Causing life to get generally more expensive,
3. And so workers ask for higher salaries,
4. Which employers pay,
5. And then the employers have to raise the price of **their own goods and services** to pay those increased labor costs!
6. …Which then cycles back to step 1 and compounds, pushing prices up further.
(If this sounds familiar, it’s because this has been our reality for the past 2 years!)
What the wage price spiral has looked like these past couple years:
Services were unavailable (e.g. concerts, restaurants, travel, etc.) so people turned their attention towards goods.
But at the same time, the supply chain capabilities couldn’t meet all the added demand for goods.
Fun fact!
In many sectors, producers must make large capital expenditures in order to increase production capacity. (For example: lumber millers.) These heavy CapEx investments require a long lead time, often multi-year.
Many producers lack either the capital to invest, or the confidence that the increased demand will persist. They don’t want to invest in CapEx for fear that two years down the line they’ll be overproducing for lower demand.
On top of all this, there are a lot of people opting out of the work force, whether for home schooling, general Covid concerns, caring for a family member, relocation, etc.
This further compounds the wage price spiral.
What are the effects of inflation?
Background info…
1. Some degree of **controlled inflation** is desirable for the economy, because it causes investors to look for investments to outpace inflation.
(📈 Investment activity = ⛽️ Fuel for the economy)
2. Controlled inflation also encourages consumers to spend now since tomorrow’s cash is worth less than today’s.
(💸 Money changing hands = ⛽️ More fuel for the economy)
The takeaway here…
All this is to say that inflation can be a good thing.
But!!! It needs to be managed carefully.
Fun fact!
For developed economies, around 2 percent inflation is the targeted “sweet spot” amount.
For developing economies, the targeted amount is usually higher. For example, India targets 4 percent. (+/- 2%)
With that background info out of the way, let’s move on to…
“How does inflation affect me?”
Who inflation is good for…
1. Borrowers
Once the banking system has money (from the government buying bonds), they’re able to loan it out.
The people who are able to get these loans are poised to benefit *significantly* as inflation picks up, especially the borrowers who were able to get fixed-rate loans.
Why?
If you have a fixed-rate loan with a rate that’s *lower* than inflation, it means that over time you repay that loan with cheaper and cheaper dollars.
2. Exporters
Inflation is good for exporters because they pay lower production costs associated with a weaker USD and sell their products in a stronger currency.
Who inflation is bad for…
1. Savers
Your dollar can buy less stuff, and the value of your cash gets eroded the longer you hold it.
2. Importers
The weaker USD means foreign-made goods are effectively more expensive.
How different assets are affected by inflation
Tangible assets
Tangible assets (that are valued in currency) are strong inflation hedges.
These allow you to store monetary value in something other than currency.
Examples include real estate (residential, commercial, land), commodities (oil, natural gas, precious metals, wheat and corn), art, and jewelry.
As inflation increases, often so could the value of these assets.
How to get a triple win!
If you were to take out a fixed-rate mortgage to buy real estate, you’d have a fantastic setup for an inflationary environment.
Here’s why:
1. You’d own an asset that historically has performed incredibly well in inflationary periods
2. You’d have a locked-in fixed-rate mortgage that you secured before interest rates rise further (the Fed has 7 rate hikes planned for 2022, and more for 2023)
3. You’d repay your mortgage with cheaper dollars over time
(Check out my free “2022 Real Estate Inflation & Recession Guide” for an in-depth overview of real estate investing in our current inflationary environment.)
What about stocks?
Historically, stocks and real estate have been great hedges against inflation.
But not all stocks are equally strong in inflationary periods.
Growth Stocks = 👎
Growth stocks are stocks that look promising for the future but don’t have particularly great numbers right now.
(e.g. Amazon, Facebook, Netflix, etc.)
Growth stocks usually take a hit during high-inflation environments. 💩
Value Stocks = 👍
Value stocks are stocks for companies that are doing well today but that investors believe are underpriced in the market relative to their performance.
Value stocks historically have done well in high-inflation environments. 📈
Fun fact!
Many (but not all) tech stocks are growth stocks, and several tech stocks (the “FAANG” stocks — Meta, Amazon, Apple, Netflix, Alphabet) also represent the largest cap stocks in the index.
This is one reason why we’ve seen such huge swings in the overall stock market lately…
Investors have been reassessing what they’re willing to pay for potential future returns on growth stocks in light of our high inflationary environment.
When the Fed tightens the money supply, there’s a risk of recession, which means battling inflation necessarily holds a degree of recession risk. This makes investors more cautious.
Said another way…
Lots of growth stocks being sold + Those stocks representing a large percentage of the total market cap = Volatility in the stock market
Takeaways and next steps
Hopefully you now have a better foundational understanding of inflation and how it affects you.
Here’s what to do next…
Stay Calm
Don’t get too wrapped up in headlines.
Don’t blow up your entire strategy and portfolio.
Remember that you’re in this for the long game, and that smart investing is about being patient and strategic, NOT trying to time the market.
Evaluate your portfolio
Take a look at your portfolio and ask yourself how your portfolio will fare if this inflationary environment lasts 2, 3, or even 5 years.*
(*Note: Historically in the U.S., it’s taken an average of slightly over two years — 27 months — for inflation to reach its ideal 2 percent target, as measured from the inflation rate at the start of a recession).
Know thyself
Start with the end in mind. Before you make changes to your portfolio, think about your investment goals, timelines, risk tolerance and risk capacity.
Fun fact!
If you’re interested in real estate investing, your next step is to check out my 2022 Real Estate Inflation & Recession Guide.
You’ll get answers to questions like…
– “How do rising interest rates affect real estate investing?”
– “If there’s a recession in 2022, will housing prices tank like they did in 2008?”
– “Can good deals still be found, or have I missed the boat?”
– “How should I set up my portfolio to handle inflation and a recession?”
Just let me know where I should send it…
What NOT to do
Don’t dump all your money into any asset that you’re not ready for.
Don’t panic-buy a house because you’re afraid of getting priced out of the market.
Don’t blow up your entire portfolio.
Don’t radically change your investing style, asset mix and timeline. Remember to think in decades; invest for the long-term.
Aim for balance and flexibility, and the right amount of liquidity for your lifestyle needs.
Thanks for reading!
If you have a friend or family member who could use some clarity about inflation, I’ll love you forever (as will they!) if you share this post with them.
And if you’re interested in real estate investing, be sure to check out my 2022 Real Estate Inflation & Recession Guide.
Hello! Dividend investing is a very interesting topic. Today, I have an expert who has appeared on Forbes, Motley Fool, MSN Money, TheStreet, and more, and he is going to share tons of great information on this subject. You may remember him from his previous contribution How I Became A Successful Dividend Growth Investor. This is a guest contribution by Ben Reynolds.Ben is the CEO of Sure Dividend.Sure Dividend helps people build high quality dividend growth portfolios for the long run.
Early retirement is the financial state of being where you don’t have to work.You only work if you want to.
Early retirement is reached when your passive income exceeds your expenses.The average retirement age in the United States is 63.
Retiring at any age is an accomplishment, but I think you will agree with me when I say that the earlier you retire, the better.
There are 6 key factors that determine how long it will take for you to reach retirement:
Your income (how much money you make)
Your savings rate (the percentage of your income you save)
Your expenses (how much money you spend)
The size of your investment account (how much you already have saved)
Your investment returns (how fast your investments are growing)
The yield on your investment portfolio (how much your investments pay you)
Making Sense of Cents has phenomenal information on increasing your income and savings rate, and reducing your expenses.These are all vital aspects of retiring early.
The size of your investment account now is based on your past decisions and for some people, being born into a wealthy family.It is what it is; you can’t change it.
How you invest will determine your investment returns and the yield on your investment portfolio when you are (early) retired.
I believe that dividend growth investing is uniquely situated to offer individual investors a way to build a portfolio for rising passive income that will lead to early retirement (depending of course on your income and expenses).
Related: What Are Dividends & How Do They Work? A Beginner’s Guide
What Is Dividend Growth Investing
Dividend growth investing is what it sounds like.The core idea of dividend growth investing is to invest in businesses via the stock market that are likely to pay growing dividends over time.
As an example, Johnson & Johnson’s (JNJ) dividend history over the last 20 years is shown below:
Source:Johnson & Johnson Investor Relations page Note:The 2017 number shows dividend payments to date.It will be higher than 2016 by the end of the year.
As you can see, Johnson & Johnson shareholders have seen their dividend income grow from $0.43 a share in 1997 to $3.15 a share in 2016.This is a 7.3x increase.More importantly, that 7.3x increase in income came without buying additional shares.
Dividend growth investing has a hidden benefit.It focuses you on the business, and not on the stock price.This means less (and hopefully no) panic selling during recessions.In fact, many dividend investors take advantage of market declines by purchasing into great dividend growth stocks while they are trading at a discount.
The reason dividend growth investing matches up with building an early retirement portfolio so well is because it provides rising income over time.This is a powerful feature that is not a characteristic of investing in bonds, gold, Bitcoin, or stocks that don’t pay dividends.
Reinvesting Dividends and Early Retirement
A portfolio that creates rising income over time is powerful.You can ‘super charge’ growth by reinvesting dividendsback into the portfolio.
When Johnson & Johnson pays its dividend, instead of taking it in cash, you can use that dividend to buy more shares of Johnson & Johnson.You can see how this can greatly increase your passive income stream in the future in the example below.
Johnson & Johnson currently has a dividend yield of 2.6%.The company has grown its dividend at 11% a year from 1997 through 2016.Forecasting 11% a year growth ahead may lead to disappointment; there’s no guarantee Johnson & Johnson will continue such strong growth.
Say the company grows its dividend at ‘just’ 7% a year going forward.If you are reinvesting dividends, your income stream from Johnson and Johnson will grow at 9.6% a year.Your income growth is simply the expected dividend per share growth rate plus the company’s current dividend yield (if dividends are reinvested).
With 9.6% a year compounding, your income from Johnson & Johnson will double about every 8 years.I don’t know many other situations outside of dividend growth investing where you have a high likelihood of doubling your income in under a decade.
Strong income growth over time is why dividend growth investing can help you achieve early retirement.It isn’t instantaneous, but it is achievable.
Where to Find Great Dividend Growth Stocks
Johnson & Johnson is a strong dividend growth stock…But it’s not the only one.There are other great businesses with long histories of increasing their dividend income every year.
My favorite place to find potential dividend growth stocks worthy of an early retirement portfolio is the Dividend Aristocrats Index.
The Dividend Aristocrats are a group of 51 stocks in the S&P 500 with 25+ consecutive years of dividend increases.A few examples of well-known Dividend Aristocrats are below:
Aflac (AFL)
3M (MMM)
Coca-Cola (KO)
Wal-Mart (WMT)
Exxon Mobil (XOM)
Procter & Gamble (PG)
Johnson & Johnson (JNJ)
The Dividend Aristocrats index is made up of businesses with long histories of rising dividends.A company simply cannot pay rising dividends for 25+ consecutive years without a strong and durable competitive advantage.
Why do competitive advantages matter? Warren Buffett himself says they are the key to investing.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” – Warren Buffett
Not surprisingly, the Dividend Aristocrats Index has outperformed the S&P 500 over the last decade by 2.8 percentage points a year…With lower volatility.
Source:S&P Fact Sheet
To put this into perspective, $1.00 invested in the Dividend Aristocrats index 10 years ago would be worth $2.59 now, versus $2.00 for the S&P 500 (both numbers include dividends).Moreover, your portfolio wouldn’t have had as severe price swings, because the Dividend Aristocrats index has lower volatility than the S&P 500.
Final Thoughts
There’s no question building a portfolio for early retirement can be complicated…But it doesn’t have to be.
By investing in individual great businesses and holding them for their rising income potential (dividend growth investing), you can build a portfolio that is very likely to pay you rising income over time.
And importantly, investing in individual stocks eliminates costly management fees from mutual funds and ETFs so your money is left to compound in your account, where it belongs.
The bottom line is that retirement requires a stream of income in excess of your expenses.That income stream must also grow at least as fast (though preferably much faster) than inflation.Otherwise, you lose purchasing power – and you won’t stay retired for long.
Dividend growth investing can create growing income streams that are likely to rise well in excess of inflation.The unique characteristics of dividend growth investing are a compelling match for those seeking early retirement.
Are you interested in dividend investing? Why or why not?