You’ve made the decision to start investing, but now what? Investing is something that people believe to be so confusing and mystifying that they often just leave it to the professionals (who charge handsomely for their services). It’s really not that nuanced, especially when you’re just starting out.
To invest is essentially to own a piece of a company, in the form of stocks. Traditionally, you could either choose to buy individual shares of stock or large pools of stock in the form of mutual funds or ETFs. Now, with fractional investing, there’s another option: buying fractions of a share of stock, which allows you to own a piece of a company for any amount of money.
What are stocks?
The words “stocks” and “shares” are almost interchangeable. “Stocks” is the more universal, generic term. It’s used to describe a slice of ownership of one or more companies. In contrast, “shares: has a more specific meaning: the ownership of a singular company.
A share is the smallest denomination of a company’s stock. On Public, you can own fractions of shares, called “slices.” Fractional investing provides greater access to the stock market by unlocking opportunities for people to own a piece of the companies they love no matter how much money is in their bank account at present.
What are mutual funds?
A mutual fund is a pool of money from many investors brought together in order to invest in a large group of assets — like stocks and bonds and sometimes even other mutual funds. The portfolio holdings are managed by professionals. The many individual investors buy shares that rise or fall in value based on the performance of the fund’s holdings.
These investors don’t own the stock in the companies the fund purchases, but share equally in the profits or losses of the fund’s total holdings — that’s what puts the “mutual” in “mutual funds.”
What are ETFs?
An exchange-traded fund, or ETF, is a collection of securities that you can buy or sell through a brokerage firm on a stock exchange. They’re very similar to mutual funds, but with one twist: An ETF is bought and sold like a company stock during the day when the stock exchanges are open.
You can invest in ETFs through Public, either by purchasing full shares or by purchases slices of ETFs.
How do you choose a stock?
ETFs and mutual funds are selected and managed by professionals and meant to be purchased by individual investors. But what about the investor who wants to choose their own stocks?
Where do you begin?
As with any financial decision, your own intentions and strategies will create the driving force behind your choices. First, consider your objectives. There are three characteristics that every stock falls into: safety, income, or growth.
Safe investments — with the full understanding that no investment is really, truly “safe” and without some level of risk — are ones made into the money market with the purchase of government bonds and bills. These investments are generally considered to be dependable and as such do not offer very high yields. They are an excellent instrument to preserve capital while generating a modest rate of return.
Income investments are generally made by purchasing bonds and bills offered by large corporations, annuities, or real estate investments. These offer the opportunity to generate a monthly income from the yield, which tends to be a bit higher to coincide with a slightly elevated risk.
Growth investments are those made by purchasing stocks of publicly traded companies and are best for long-term growth. The average returns of investing in the stock market are much higher than with other types of investing, which again coincides with the risk. A long-term mindset is essential when investing for growth.
Historically, the has market followed an upward trajectory over time. Not each year, not each month, week, or day. But always up. Historically, the market provides 7% returns to its balanced investors. A balanced investor buys into safer investments while making room for the growth-driven and income-creating stocks as well.
Thematic investing
Once you’ve decided on your objective, many investors’ next step is to target a theme. Industry-specific portfolios, like banking and tech, or niche portfolios, like gaming or artificial intelligence, are popular choices.
Some look for industries that are going strong but still have room to grow. The recent legalization of cannabis in many states has enticed investors to buy stock in like-minded agricultural companies. Healthcare has been a popular theme in the past decade or so due to the aging Boomer population and their upcoming needs that these companies seek to satisfy (think assisted living and medical research).
To help make browsing stocks easier and more user-friendly, Public organizes public stocks within themes. That way, you can search for the brands under the umbrella of causes or business operations that you want to support most. Want to find companies with Female CEOs? We’ve got a theme for that. You can also browse by themes like Clean and Green for environmentally-friendly companies, or take a look at the most popular choices. We want investing to be as streamlined as possible, and part of streamlining means organizing your investment possibilities.
Not sure where to start?
Some investors go with what they know, or what they know the most about. By investing in companies that are in areas you are already familiar with in or interested in enough to follow, you might be a little less overwhelmed by the changes in the market.
Make an educated guess by using P/E ratios. Price-to-earnings (P/E) ratios are the measure of a current share price relative to its per-share earnings. P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison.
Go with growth. Companies that are able to capitalize on a trend that takes years to play out can often see their revenue and profits grow for years on end, generating huge returns for investors. For example, the war on cash is heating up and companies like PayPal and Synchrony are making headway in the cashless transaction arena. Keep in mind: potential high growth companies come with both reward and risk.
Look at the debt. The debt-to-asset ratio is a simple calculation that investors can use to make sure a company is solvent, is able to meet current and future obligations, and can generate a return on their investment. The information is available on the balance sheet that a company releases during its quarterly report. A debt load of less than 40% is ideal.
Keep your ear to the ground. Add a few business and finance podcasts to your mix, follow the social media accounts of financial educators, and create a news alert for the companies you purchased stock in. By staying on top of the news you’ll be a better-informed investor.
Some things to avoid
Following the hype. Your coworker bought a bunch of shares in a company you’ve never heard of? That may be exciting for her, but it doesn’t mean you have to do it, too. It’s one thing to be guided by people who inspire you, it’s another to ditch your path to follow theirs.
Following the leader. The same goes for people who know way, way more than you, too. Just because your favorite analyst or reporter makes a declaration doesn’t mean it’s the gospel truth.
Chasing the dollar. Penny stocks are so hot right now, right? Price alone should not be the only factor. Just because shares are cheap doesn’t mean that you have to throw common sense out the window.
It takes a village
There’s no one size fits all approach to investment. Accounting for goals, timelines, patience, risk-tolerance, and budgets as unique as the investor attached to them create a million different options. The only right strategy for you is the one that fits your needs. Knowing what you’re invested in and why is a big part of making your money work for you.
Technology and social media are changing the dynamic of investing by making it more accessible and transparent.
The digitization of brokerages (online vs. brick-and-mortar), reduced minimums and/or commission structures, and fractional investing are total game-changers. Fractional, or investing by the slice, a la Public, has become increasingly important in recent years — some of the most popular stocks can trade at $500 or even $1,000 or more per share.
The resources available to the average investor are staggering: financial news, calculators, think pieces, and expert advice is available to everyone everywhere. Public’s community-driven platform allows investors to see other people’s transactions in real-time. Want to ask someone about their investments? It’s as simple as leaving a comment on their activity. You can create valuable relationships with other investors no matter their experience level and get the most out of your Public portfolio.
The bottom line
There’s no “right way” to invest, there’s just the way that’s right for you. Stocks, funds, ETFs, long- and short-term strategies all have a time and a place. By leveraging the knowledge available to you, you can be sure that you’re making the best choices for you right now — and down the road.