Let’s start with some basics

Published 12:10 pm Saturday, October 28, 2017

by Meghan Councill

This is week one of a journey I’m thrilled to be starting with The Tidewater News. Each month we will publish two “Investment Straight Talk” columns. I’ll be starting with the basics and building to more involved strategies and also answering questions received from readers.

The purpose of this column is to educate and share valuable knowledge about an increasingly complicated investment landscape and options within.

Many of us are faced with life decisions that include retirement planning, educational planning, life insurance purchases, work place planning and long-term care to name a few. These are important decisions that can weigh on many other choices you will make in the future.

Let us start at the beginning. There are four ways you can use money: you can spend, save, donate or invest. Investing is simply getting your money to work for you in order to preserve wealth, grow wealth or provide income.

Companies need money to operate and grow. There are two different ways they raise money: selling ownership or borrowing money. When a company sells a piece of ownership for money, it delivers stock (or “equity”) to the buyer. Stockholder = Owner. When a company borrows money, it delivers a bond (or “fixed income”) to the lender. Bondholder = Lender. We will dive more deeply into bonds in our next column.

Public stocks can be bought and sold on exchanges (e.g. New York Stock Exchange) where each stock is assigned a symbol. Stockholders may make money in two ways: Appreciation (stock price goes up) or Dividends (company pays out some of its earnings.) While investors can make money in stocks, they can also lose it all if a company that they own goes out of business.

Performance (price appreciation) can be calculated using this formula: (Ending Value – Beginning Value) / Beginning Value. Dividends can be an indication of a company’s financial strength (growing dividends = strong; cutting dividends = weak.)

The global pool of stocks can be classified in a number of ways.

  • By location: Domestic (U.S.) and International (Non-U.S.) International can be broken down into Developed (established free market economies — e.g. Europe, Australia, Japan) and Emerging Markets (less established markets — e.g. Brazil, Russia, India, China.) Domestic and International stocks tend to move in multi-year cycles.
  • By Business Type (“Sectors”): The 11 standard sectors are Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology, Real Estate Investment Trusts, Telecom Services and Utilities. Sectors tend to rotate in and out of favor year-to-year.
  • By Size: The size of a company is determined by its Market Capitalization. Market Capitalization = Price of Stock x Number of Shares Outstanding. Large Cap (>$10 billion), Mid Cap ($2 – $10 billion), Small Cap (<2 Billion.) Smaller Companies have outperformed larger companies over time (“Small Cap Premium”.) But, higher return = higher risk.
  • By style: companies are usually considered either Value (priced cheaply, appear to be “on sale” relative to their own history or their peers) or Growth (priced fairly or maybe even overpriced but expected to grow their earnings rapidly. Value stocks have outperformed growth stocks over time (“Value Premium.”)

Each investor is unique because each of us has different life goals, income needs, debts, stresses, dependents, etc. As we start this discussion about investments, keep in mind your individual situation and how these topics relate to your investments. Please feel free to send questions and comments to me at mcouncill@investdavenport.com.

The information provided is for information purposes only and should not be considered an individual recommendation or personalized investment advice. Each investor needs to review his or her particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Investing in stocks and the equities market always carries risk. Equities are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees.

The statements and opinions expressed in this article are those of the authors as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Davenport & Company LLC. This information may contain forward looking predictions that are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing always carries risk.

There is no guarantee that a company will continue to pay dividends.

MEGHAN COUNCILL is a Registered Representative with Davenport & Company LLC. Member NYSE-SIPC-FINRA