Let me explain a couple of things today. Indexes, strategy, profit… some important stuff that you need to know to start investing and become a millionaire. There are only 3 main instruments on the market and you will easily understand them.
1.Stocks
2.Bonds
3.ETFs
Stocks
What?
You buy shares of a company and own a part of their business.
Where does the money come from?
1. If a company grows, the price of its stock rises.
2. Company shares its profit with stockholders—known as dividend payments.
Example for kids
1. Your grandma produces honey for your small neighborhood. There are only 20 jars available. You have one jar of grandma’s honey. You used to sell it for $10. Suddenly, the nearby town finds out about this wonderful honey and more people are coming to buy it. The demand grows and now you can sell your jar for $15.
2. The business is growing well, so your grandma decides to treat you and gives you one cup of honey for personal use—she’s paying you dividends.
Example for adults
6 months ago one Procter & Gamble share cost $122, now it costs $144. That’s an 18% increase! The company pays dividends 4 times a year and the annual dividend rate is 2.42%.
Bonds
What?
You act as a bank. You give a company or government money for some time to finance their activities.
Where does the money come from?
If you act like a bank, then you should get interest. So the bond issuer pays you fixed income every year until the end of the period. At the end of the period they return you the face value of the bond.
Example for kids
1. Your friend needs a lot of empty jars for his installation. He borrows an empty jar from you and from a couple of other classmates.
Every day of the week your friend gives you one candy for your kindness. At the end of the week you receive your jar.
You got back your jar and got 7 candies.
Example for adults
A JPMorgan bond. You lend them money by buying their bond at $95. They offer you a 2% yield. The maturity date is 31 July 2033. It means that until 2033 they will pay you a 2% coupon every year and in the end return the price at offering—$100.
ETFs (Exchange Traded Funds)
What?
A portfolio of compiled securities. It can consist of just stocks or just bonds, or a mix of the two.
You buy a share of this portfolio and it costs cheaper than if you buy all the securities individually.
Where does the money come from?
If the price of securities within the fund rises, the price of your share rises.
Example for kids
1. There is a jar with very delicious candies. And the longer it is closed, the more children want it. It has 20 candies, your friend sells a full jar for $10 (the current price of each candy is 50c). You can’t afford to buy the whole jar and your friend doesn’t sell by piece. So you agree that you buy 1/20 of the jar for 50c, meaning that if your friend sells the jar you will receive 1/20.
After one week your friend goes to school and sells the jar for $20 to a rich boy. Now you get 1/20 of this—$1.
Example for adults
Fidelity Health Care ETF. Their portfolio at $30 per share consists of the following companies, the whole portfolio grows at the annual rate of 19,78%.
TTFs (Thematic Trading Fractional model portfolios)
What?
It is also portfolio of compiled securities which is automatically rebalanced. You are buying not a share of this portfolio, but a fraction of each stock directly based on their shares in the portfolio with any sum of money. It gives you tight correlation with price changes and more flexibility in terms of money you want to invest.
Where does the money come from?
If a company grows, the price of its stock rises.
Example for kids
There is a jar with very delicious candies, but all candies are different (just like stocks). Instead of buying the fraction of the jar with 20 similar candies for 50c, you invest 6 dollars into just 6 top candies and sell it for the same $10.
Example for adults
Green Energy TTF is a model portfolio with just 13 companies which produce electric power. They are picked as the best companies within this topic based on their financial performance, volatility and expected returns. Such focus and thorough selection leads to better results in comparison to other major Green Energy ETFs.
So the stock market is a part of an exchange, like New York Stock Exchange, where these instruments are being traded. You can also trade precious metals (like gold), futures, options, and currencies but it’s the next level.
Benchmark
Don’t rush to buy P&G stocks yet and don’t underestimate bonds.
One more thing you need to know is to understand what a good result is.
Do you think an 18% increase in the P&G stock price is a good result?
In the previous article I told you that Apple grew 100% in a year. That’s terrific! So in comparison to Apple, P&G is lagging.
To understand how well your portfolio is doing, you need to compare it to a benchmark. And we’ll take an index of the broad market as a benchmark. This index is called S&P 500 after the agency that created it, Standard & Poor. The index consists of the 500 largest American companies that represent 80% of the US economy. Roughly speaking, they summarize the value of stocks and their change in prices shows general tendency. You can compare any TTF with the benchmark in the Gainy app in one click. If the result is higher than that of S&P 500, the asset outperformed the market. If not, it underperformed.
Here you can see how the index (and supposedly US economy) have been growing for the past 30 years.
Can you name all the events (1-4) that caused the stock market to fall? (check your answers at the end)
Ideally, the prices on the stock market should reflect the fair value of an asset. But in reality expectations towards these assets drive prices far from it, and then we face declines that bring prices back to normal and cool down very optimistic investors (event 1). During the Dotcom bubble (1) many companies were overpriced and their earnings did not match their market value, as a result, the bubble burst and stock prices fell down.
Sometimes, conflicts or global problems can cause a decline in anticipation of economic slowdown (3 and 4).
On the bright side, you can see that the economy and the stock market recover pretty fast and, as a matter of fact, it’s a big luck to buy stocks at the bottom of such a dip. Because it’s only growing after it…
Investment strategies
Strategy №1. Buy S&P 500 index shares and hold them.
Since it would cost a fortune to buy stocks of 500 companies, there are special funds that buy them for you and you just own a share of this fund. In professional language, you buy an S&P 500 ETF.
S&P 500 ETFs that you can buy:
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
- Fidelity 500 Index Fund (FXAIX)
It would be very useful if you also read about two other major indexes NASDAQ and DOW JONES. You can buy ETFs for these indexes, too.
Buying index funds is a safe and conservative way to invest. The risk is very low because the fund holds stocks of companies that are very diversified across industries.
Expected annual yield: 15-20%
Level: Easy
Risk: Low
Strategy №2. Pick individual stocks
In the last year the following stocks grew considerably:
Thus, their yield is higher than that of the S&P 500.
At the same time, some stocks did not perform as well:
These stocks rose less than the S&P did in the last year. Even though all these companies are absolutely fine, if you had invested in them a year ago, you would have lost to the broad market.
As you can see, investing in individual stocks gives you more potential for profit but is also riskier than investing in the stock market as a whole through indexes or ETFs.
Expected annual yield: 0-100%
Level: Moderate
Risk: High
Strategy №3. Invest in TTFs
Picking individual stocks is hard. It is easier to think in terms of trends. For example, you might have seen that social media is a growing sector in 2010s, but it would be difficult to say which company would rise the most because of so many variables. The safe way would be to invest in the industry as a whole. Here's when TTFs come in handy. Rather than investing in broad sectors like tech through ETFs, invest in Virtual Reality and AR, 3D printing or Fintech.
TTFs combine the best of both worlds and give specialization for higher returns and moderate diversification to reduce risk.
Expected annual yield: 0-100%
Level: Moderate
Risk: Moderate
Is it possible to choose companies that will always outperform the market?
The short answer it no,
but
when we talk about the stock market we always talk about probability. You CAN increase this probability and reduce risk by buying not one but several stocks. TTFs are perfectly designed for it.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Answers:
1 - Dotcom bubble
2 - Global financial crisis
3 - Trade war with China
4 - COVID-19 breakout
Get More Value!
You will get from us best tailored content that will help your business grow. Early bird news, bonuses — only for subscribers!
