Wealth

Part 3 - INVESTING

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GETTING RICH used to be difficult. Few of us have the talent or tenacity to start a new business, but now it is very easy to invest in publicly traded businesses that grow steadily and create wealth in the process. Stock markets are wealth generating machines . . . you might as well buy a small share and watch it grow. 

Sure there are ups and downs and there are risks but on average and over time it works well. Check the graph in part one again. Do not believe communist/socialist propaganda that the market is a zero sum casino and someone is ripping you off. 

Forget about getting rich quickly. Rapidly trading stocks, betting on derivatives, selling short (selling stock you do not own hoping to buy it later at a lower price), or borrowing money (leveraging) are all ways to increase risk. 

 Get rich slowly by investing a regular amount of your income in a diverse range of successful, growing companies and re-investing all interest, dividends and capital gains (This is known as compounding) and holding for many years. 

When you save money for later use, you are investing the surplus wealth you have created by your work. Banking is the safest way to save as bank deposits are generally insured, so your money is safe even if the bank disappears. But often the interest is less than the rate of inflation and it will be added to your taxable income so after tax and inflation your savings will be slowly falling in value. Bonds are typically regarded as a safe way to invest but low interest rates mean that bonds are declining in value at the rate of inflation.

Publicly traded companies often pay dividends monthly, or every three months, which is more than bank interest. Also, share prices tend to increase with inflation but dividends and capital gains (when stocks are sold) are taxable. (In Canada, dividends paid by Canadian companies are taxed at a lower rate than interest payments and only half of capital gains are taxed in Canada and this tax is less in the USA).

If you buy shares (stocks) of a company, you are a part owner and benefit from any dividend paid, or any increase in the value of the share (this is a capital gain).

You can reduce risk by diversifying. If you do not have a lot of money you can do this by buying shares (units) of an exchange traded funds (ETF). These typically own many different companies so if one of them does badly the ETF does not suffer unduly.

Or, you can choose companies that have a steady business. Telephone companies and bank shares are relatively safe as are other regulated utilities such as natural gas and electricity suppliers.  If you have little or no investing experience, look for managed funds with a good return and a low management expense ratio (ETF's are cheaper to own than mutual funds), but with a modest amount of research you might like to set up a self directed trading account and start by buying an Exchange Traded Fund (ETF) directly. There are hundreds of these, many owning stocks in particular industries such as technology, banking, mining or energy. Others may have special objectives like high yield or dividend funds. Most ETF's are not actively managed and therefore typically have lower management fees than managed funds.

Examples of ETF's are;- QQQ (40% of which is invested technology companies like Apple and Microsoft), SPY is the symbol for an ETF based on the S&P 500 of large-cap U.S. stocks.

XIU is the symbol for an ETF based on the Toronto Stock Exchange index of Canada's top 60 companies.

You can look these up without charge on;-

https://ca.finance.yahoo.com (For Canadian stocks put .TO after the ticker symbol).

Some brokers, like Questrade (https://www.questrade.com/home) , offer funds that contain several ETF's based on your risk tolerance. You may chose funds that are low risk; these typically grow slowly and offer relative high dividends or you may choose high return funds that have a higher price volatility, lower or no dividends, and are riskier. Or you may buy both. You can buy any number of shares in a particular company but diversification lowers risk so it makes sense to buy a small amount of a number of different companies. Most experienced investors have less than 15 to 30 different companies in 5 to 10 different sectors like banking, technology, energy, mining, retail, real-estate, construction, health care etc.