Stocks are very misunderstood
I have talked about :
- Savings Accounts
- GIC/Time Deposits
- Bonds
- REIT (Real Estate Investment Trust)
Savings accounts because they are a great place to start. GIC/Time Deposits because they can be useful tools. Bonds because they are fixed income like Savings Accounts and GIC's even if they aren't as useful for new investors. REIT's because it seems like everyone wants to invest in real estate (which isn't realistic for new investors) and REIT's seem like real estate that you can buy in small pieces. Also monthly income but not guaranteed like the previous three instruments.
What do I want to talk about next?
Mutual Funds which are a pretty good option for those people with a few hundred dollars, a desire to invest, and want someone to hold their hand at the bank until they are more seasoned investors.
OR
ETF's which are very much like mutual funds for those people who have a few hundred dollars (or more), a desire to invest, and are willing to not have someone to hold their hands in return for lower management fees.
Unfortunately I have to talk about stocks and the stock exchange next
That isn't because I think any new investor should go out and get a trading account and buy stocks. Both of my sons did that and both of them lost money on them. I hear things like:
"Build a Bear is doing really well"
"My friends say XYZ is the new thing"
"ABC is going viral right now"
…and those are reasons that make me cringe.
Let me give you non-stock examples of why those ideas make me cringe.
#1 : Do you buy clothing when it's in season and fashionable or do you buy it when it is on sale?
If you are like my wife or my sister you would always try to avoid buying things that aren't on sale. They like to buy quality items on sale or off season and then hold until next season when they know it will be much more expensive.
Just like clothing, stocks go up and down in price. Sometimes it is just the "wrong season" and the price drops. Other times it is "in season" and the price rises and people are willing to pay a premium.
The tricky part is that, unlike clothing, you don't know when the "season" is going to change. Sometimes things that look expensive keep going up. Sometimes things that look cheap stay cheap for a long time… or get even cheaper.
Look at the price of oil right now. It has jumped recently due to supply issues and global events. If those issues continue it could go higher, but if supply stabilizes it could just as easily come back down. There are a lot of moving parts—far more than any average investor can track with certainty.
In short:
oil stocks might be "in fashion" right now and buying them could mean paying a premium. When they fall out of favor, prices may come down—but that doesn’t guarantee they’re a good deal or that they will recover.
Of course… there is always the other side. What if something stays out of fashion because the business is actually in trouble?
#2 : Buying Viral stocks or the "new thing".
Remember fidget spinners?
Go back a decade or so and every kid wanted one. They were the viral, in demand, cool thing to have. At first they were hard to find. Prices shot up. Demand was huge.
Then the stores got full of them.
They sold really well… for a short period of time. Then nothing. Stores had hundreds of them and prices dropped like a stone.
The same kind of thing can happen with stocks.
A small number of people who get in very early on a trend can make a lot of money. The problem is that most people hear about it after it's already taken off. By then, you're often buying from someone who got in much earlier and is happy to sell.
If you have heard the term "pump and dump"? Most commonly used with crypto but it applies to stocks as well. The people selling into the hype can do very well. The people buying the hype… usually don't.
But what are stocks
Many people don't realize that stocks or "shares" are usually just a piece of a company.
If you buy one share of Tesla you are buying one tiny piece of that company. Same with Coca-Cola. Same with McDonald's. You are becoming a part owner, even if it’s a very small part.
There are many, many different companies that are bought and sold this way, and those shares are traded on stock markets.
Individual investors don't go directly to a stock exchange to buy shares. Instead, they use brokerages which act as intermediaries and place trades on their behalf.
Personally I deal with Scotia InvestDirect, WealthSimple, MooMoo, and WeBull. Each one has its own advantages and disadvantages. For example: Scotia has a lot of information and a wide variety of things to buy and sell—but I pay for every trade. WealthSimple has a more limited selection, but I don’t pay commissions and I can even buy partial shares.
Traditionally business does better than guaranteed investments
Comparing shares in companies to a regular savings account? There is a much greater potential for earning money with shares.
But that potential comes with risk.
Not every company lasts forever. Not every company continues to make money. Some companies look strong for years and then decline due to poor management, competition, or changes in how people buy things.
That’s one of the biggest risks of buying individual stocks—you are depending heavily on one company doing well.
Have you heard of the Yellow Pages?
They were the go-to place to find businesses and phone numbers before the internet. They made huge profits for decades… until people stopped needing them.
Have you heard of Blackberry?
They made some excellent phones and their messaging system was hugely popular. Then smartphones evolved, competition increased, and they lost their dominant position very quickly. The company still exists today, but it’s a very different business than it used to be.
I used to shop at Sears, K-Mart and The Bay… each of which had shares and a large retail presence. I bought shares not realizing that they were struggling as shopping habits changed.
End result: I lost money on all of those shares.
Why I don't recommend stocks for new investors
There is a bewildering number of choices and it can be very hard to tell:
- if a company is actually profitable
- if it will stay profitable
- what its future looks like
There will be a time for investors to get into stocks/shares—but in my opinion it shouldn’t start with picking individual companies.
Next up
I'll be talking about Mutual Funds and ETF's which allow people to buy a basket of a bunch of different stocks and other investments along with other people.
Instead of relying on one company, you get exposure to many at once.
Those are my vote for where most new investors should look next.
That is also what I'll be writing about in my next couple of articles :)
Thanks for reading and hope you drop by for the next parts as they come up. Thank you.
As a side note
Some people may be tempted to get their favorite AI to pick and choose stocks for them. Honestly they may do a pretty good job of finding some useful stocks. However, I asked ChatGPT to get an image for this article and the first article it made?
Amusing in this situation because it is so wildly wrong. Funny here, but potentially disasterous if it is with your hard earned money and investments. Just a quick word of caution :)
...and yes, the images in this article are created by Dall-e. One with possibly pasting the wrong prompt into the AI but still...just like with investing... a small slip up can become a large mistake