What are Stocks?

With Your chosen platform as your weapon of choice, this then depends on how you will be able to invest your funds/stocks/REITs. Like i said in the previous post, each platform offers different services ie. Vanguard only offers Vanguard funds, compared to Hargreaves Lansdown, which offers funds and individual stocks, then there is something something like Trading 212 which gives you even more choice in what stocks and fund you are able to invest in.

Index Fund

An index fund aims to track an index for example the S&P 500. The S&P 500 is a collection of the 500 biggest companies in the US. If you invest in the S&P 500 then you will essentially own shares in companies such as Apple, Microsoft, Google, Coca-Cola, Johnson & Johnson and even the newly added Tesla.

An index fund usually has a low management fee due to the low maintenance requirement.

ETF (Exchange Traded Fund)

An ETF is similar to an index fund in the way of, you buy into a particular fund, and then you own shares in multiple companies, this could be only 20 companies, but it could be 200 companies depending on the fund. But the difference with an ETF is that its goal is to track or if possible have a better return than an index fund. They try and achieve this by investing in particular stocks which meet certain requirement for that fund, and chopping and changing them depending on each stocks performance. For example, you could invest in a fund which only holds companies which produce green energy, or you could invest in a fund which only holds healthcare companies. Due the this chopping and changing, an ETF will usually have a higher maintenance fee than an index fund. 

Individual Stocks

Now, individual stock is where things get a little more interesting, in my opinion. This is also where it get a little more hands on. If you want to invest in individual stocks, then your portfolio will be a lot more “focused” shall we say. With the index funds and ETF’s, you essentially invest in a basket of stocks or other ETF’s which is pre-made by someone who’s job it is to monitor and chop and change what is in the basket to get a certain outcome. With individual stocks YOU are the manager! You decide what stocks you invest in, you decide what percentage of allocation each stock you own, it is entirely down to you. Because of the, the risk to reward is higher, if you want to invest 50% of your portfolio into Tesla you can do that, if you only want 1% in Tesla then that is also fine, it is completely down to you. I suggest doing your own research on each stock, but personally, if I like a company and I think it hs going to be around for the next five to ten years, I will buy some shares. 

Now, the two main ‘types’ of stocks which I like to talk about, this is “growth stocks” and “dividend stocks”. 

Growth Stocks - These tend to be new companies which have a lot of momentum. As the name implies, these stocks are meant to grow. So if you were to put £100 into a growth stock and it appreciates by 10% within a year (which is still above the average appreciation of the S&P 500) then that purchase is now worth £110, basic math. But there are companies out there which have appreciated far more that 10%. At the time of writing this Tesla has appreciated 280% within the last year which means if we had put in the same £100 into Tesla, then it would now be worth £380. Now taking Tesla as an example, it was not smooth ride, there’s been days where the stock has dropped by 10% maybe more. 

Dividend Stocks - These stocks tend to be a little more boring. A dividend is a portion of the profit that a company makes which is handed out to the shareholders of the stock. It’s like getting paid without going to work! So example time, Apple, everyone knows Apple. You know one of the biggest companies in the world, they currently pay a dividend. Their current dividend yield is 0.63%. But for easy maths again we will assume that the dividend yield is 5% and the price of the stock is £100. At the yield of 5% this means you will get £5 on an annual basis for every share that you own of that particular company. Big math time. Apple is currently trading at £93 and has a dividend yield of 0.63%, which means that you will receive £0.58 per year per one share of Apple, it doesn’t sound like much but over time these all add up. But don’t get hung up with high dividend yields because a high dividend yield is not always a good thing.

With the math out of the way we can get back to the subject at hand. For a company to be able to pay a dividend, then the company has to be making profit, but because the company is making a profit, does not mean that the company has to pay out a dividend.

Also dividend stocks tend to not grow as much as growth stocks (this is not set in stone), because they have already reached the ceiling so to speak, and it is hard for them to grow bigger. Take Coca-Cola, how much bigger can they grow?

REIT (Real Estate Investment Trust)

REITs are very similar to stocks, they are corporations who primarily invest in real estate. For a company to be classified as a REIT they must comply by some rules: 75% of the company’s profit must be generated from rental income; 75% of the company’s assets must be properties available to rent; 90% of the company’s rental profit must be paid out to shareholders via dividends.

Due to these rules, buying into a REIT is the easiest way to gain exposure to the property market. You don’t have to save up 10% for a deposit and then go through the tedious process of purchasing a property. You can take £100 buy into a REIT and start getting a dividend which is being paid out primarily from rental income.