Part II – Question about STOCKS?

Posted Friday, August 28th, 2009. Filed Under Financial Empowerment

QUESTION
We wanted to know what financial topics you wanted us to write about. I received an e-mail last week from Kimberly NJ:

I would like to read about stock.  Quite frankly have no idea how to invest in stock. I understand that it is a great way to earn passive income but thats all. I see people looking at the news paper and reviewing details – I always wonder how to get my hands around it.

🙂 Kimberly

ANSWER – PART II
Stocks is such a large topic. When Nellie Chowbay, Investment Advisor & Financial Planner, BMO Nesbitt Burns, provided an
answer for us to this question, she gave so much valuable information that we decided to break it into two parts.

The second part is “WHY” stocks versus other investments.  When considering you need to decide how much RISK – what you are willing to lose OR gain – from your choice. The great thing is that for most stocks you are not bound to a time frame.  You will need to speak to your financial planner or bank about this further.

WHY CHOOSE STOCKS?
2. Why you will choose a stock vs. another type of investment?

I. To get higher returns
Stocks provide greater return potential than bonds, but with greater volatility along the way. Selecting a certain investment depends on the risk tolerance level of the investor.

II. To get more liquidity
Stocks provide more liquidity (ability to go to cash) than bonds or other investment instruments.

FACTORS TO CONSIDER:
Long Term goals-

Long Term goal determines the kind of investment to choose. Fixing the long term goals also depends on your risk tolerance level. A few examples of long term goals are;
. Paying for children’s college education
. Funding a long and active retirement

Risk Tolerance Level-
Risk tolerance is the degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.

Before starting on the setting of the investment portfolio, every investor should establish their risk tolerance level. Only after this they are ready to build strategies for the accomplishment of their financial goals. The higher the degree of risk involved in the investment portfolio the greater the chances of higher returns and failures.

Low Risk Investment

1. Bonds
Bonds represent your loan to a government or corporation, and generally offer steady, fixed income. The primary advantage to bonds is that they have a fixed maturity and, ignoring the potential for the company going bankrupt, you know exactly how much money you will be getting and when. But this is only true if you hold the bonds to maturity. You can choose the amount of time you want a bond for. Longer time periods yield you higher return rates. Also, bonds are extremely stable, especially government bonds.
Unfortunately, bonds have significant disadvantages. Because they are so stable the reward on an excellent bond is dramatically less than an excellent stock. Investing in a bond also renders your money illiquid, meaning it’s locked away and inaccessible for a period of time.

High Risk Investment

2. Stock
Many investors purchase a particular stock with the intention of making a big profit over a short period of time. The stock market is characterized by the trade-off between risk and return. The higher the risk the investor is willing and able to take, the higher the potential rewards from the investment. Therefore, if a particular investment offers you high returns, it is an indication that it will come with a high risk burden.

Information provided by: Nellie Chowbay, FMA, FCSI
Investment Advisor & Financial Planner | BMO Nesbitt Burns | 416-359-5365 | www.nelliechowbay.com

Disclaimers
BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée provide this commentary to clients for informational purposes only.  The information contained herein is based on sources that we believe to be reliable, but is not guaranteed by us, may be incomplete or may change without notice.  The comments included in this document are general in nature, and professional advice regarding an individual’s particular position should be obtained.  BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée are indirect subsidiaries of Bank of Montreal and Member CIPF. “BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under licence.

ANALOGY WHEN SHOPPING:
When I am shopping for clothes I consider the purchase – is this something that is high fashion for the moment (HIGH RISK) and I know that in a few wears or few months I will likely not want to see this piece of clothing again OR is it a staple piece of clothing, one that will last for years and years (LOW RISK).  I also think how much will I spend for each of these categories. I definately have a limit of what I will spend for something that may only last one season versus a skirt, pair of pants, dress, purse, that I know will be carried through year after year.

Of course there are the one offs that I purchase that I spend a lot on and know that I may only wear it a few times.  These are NO RISK for it is totally based on emotion – LOVE FOR THE PIECE.

When considering stocks, please get fully informed about fees – from the investment person/institution, trading costs, and more. You always want to know what your net is.

Be well and make good decisions – these “pieces” may be in your closet for a while!

All my best,

Sandra




logo

Share Your Thoughts
with sandra@2bempowered.com



Comments

Leave a Reply