Investing for beginners #6 – Making an investment in stocks, ETF’s and others

buying stocks

Welcome back cheapskates! If you’ve been following this series, you’ll now be fully clued up on why to invest, how to build a portfolio and good practices when growing your wealth.

In this article of investing for beginners, we go into more detail about the different types of stock, the pros and cons and some examples of what we personally invest in. We also show what we believe to be a great allocation for a beginner portfolio. So let’s get into it!

ETFs

“By periodically investing in an index fund, know-nothing investors can actually outperform investing professionals”

– Warren Buffet

Let’s start with the belle of the ball – the ETF. The story of the ETF goes back some 50 years, but the story really gets going when mutual fund legend John Bogle launched the first public index fund in Dec 1975 called the First Index Investment Trust. This fund tracked the S&P 500 index and at launch had just $11 million in assets under management. Now known as the Vanguard S&P 500 index fund, when Bogle died in 2019 it has a whopping $441 Billion in assets!

ETFs have become increasingly popular over the years and it’s easy to see why! An investor can get exposure to lots of different stocks by investing in just one. They are called exchange traded funds because they are traded on a stock exchange, just like a stock, so their price will change throughout the trading day as people buy and sell, unlike a traditional mutual fund. Investing in an ETF is like investing in a basket of stocks. They usually track an index (like the FTSE) but can also follow a range of different industries, investment types and geographies. Want to invest in the US market? Instead of picking stocks, you might opt for an ETF like the Vanguard S&P 500 ETF (VOO) which tracks the price of the 500 largest US companies by market cap (value of the company as traded on the stock exchange). Want to invest in the top UK companies? There are ETF’s for that. Want to Invest in the top electric vehicle companies? There’s an ETF for that. Want to invest in a collection of smaller companies with growth potential from across the globe? You guessed it, ETF for that. In fact, there are over 7000 ETFs being traded globally so youre sure to find something to suit your needs.

Pros

  • ETFs give you instant diversity to a large number of stocks that meet your investing needs
  • They are regarded as lower risk (especially the larger index tacking and all market type ETFs)
  • Your money is invested in the underlying asset, meaning the price of the ETF is accurate to the companies / index it follows
  • Some ETFs pay a dividend just like companies if the underlying companies pay dividends
  • Fees are relatively low compared to mutual funds or other actively managed investments.
  • You will usually get the same return on your investment that the market returns, which historically has beaten most active fund managers

Cons

  • Due to their diversity, returns are usually modest / follow the market – don’t expect 5x returns which could be possible with a stock
  • Although fees are incredibly low (some as low as 0.05%),there are OCFs (ongoing charge fees) which you wouldn’t get with stocks. Fees for some more niche ETFs can be higher, for example the iShares global clean energy ETF (INRG), which has a charge of 0.65%
  • Dividends are usually lower than high yield dividend stocks as most ETF’s track indexes which contain companies which do not pay a dividend. Note, there are ETFs designed to specifically track dividend paying companies.

What we invest in

As per our disclaimer, the below stock picks do not constitute financial advice but is merely a note of stocks that we currently have holdings in.

As per our previous article, we like to hold a solid base of ETFs in our portfolio that cover the broad global markets. Due to having 30 years of investing ahead, we are young enough to take on some additional risk in the form of bigger investments in emerging global economies of the future (like china and india) and more niche ETFs (like healthcare). Here’s some of the ones we invest in and why:

ETFWhy
Vanguard S&P 500 ETFA very low cost ETF that follows the S&P 500. Gives great exposure to the American market
iShares Core FTSE 100 ETFA very low fee ETF that tracks the FTSE. Gives exposure to large cap UK stocks.
iShares MSCI World Small Cap UCITS ETFRelatively low cost ETF that contains over 3000 smaller cap companies from across the globe
Vanguard FTSE Emerging Markets UCITS ETFLow cost ETF that contains over 1800 stocks of large and mid cap companies from emerging markets accross the globe like India, China and Brazil.
iShares Global Clean Energy UCITS ETFA moderately priced, niche ETF containing 30 companies in the renewable energy sector.

Stocks

Moving on to what we all think of when we think of a wall street trading floor – stocks.

Simply put, ‘stocks’ or ‘shares’ are pieces of a company and its potential future profits (and potential losses), which can be purchased. Specifically, when we’re talking about purchasing stocks and shares, we usually mean shares of a publicly traded company that’s sold on a stock exchange. Companies will split their company up into a number of shares (usually in the thousands) and sell them. They do this to raise cash to fund growth, develop new products or to advance the company in some way. Note though that having a share of a company doesn’t mean that you get to sit with the board of directors or have any ownership of its assets, so no lunches with Jeff Bezos unfortunately.

The more shares of a company people buy on the stock exchange, the less shares of that company are still available and this drives the price up. If people decide to sell their shares, more shares become available and the price comes down. The goal of the company is to ensure its value keeps going up and so too its share price. Good for the company, good for the investors.

There’s two main ways to make money from stocks:

  • Selling the shares for a profit – Also known as capital gains, you buy the shares for a certain price, the company grows, the stock price goes up, you sell for a profit.
  • Dividends – Many companies pay a portion of its profits back to its investors. They do this if they feel the company is unlikely to grow a substantial amount regardless of how much money the throw at it, so they opt to give these profits back to investors.

The stock market on average grows around 7%-10% annually. You can replicate these gains by building a diverse portfolio with ETFs. With that in mind, the only reason we like to invest in stocks is if we feel the stock has the potential to return more than that or is at a discounted price relative to its value – known as growth stocks and value stocks respectively.

Growth stocks and value stocks.

Growth stocks are those companies that have the potential to outperform the market over time due to their future potential. These companies generally don’t pay a dividend as you would expect these companies to use their profits to try and grow the business faster than the market. These companies could include fintech companies, renewable energy companies and the like.

Value stocks are shares in companies that are trading at a lower price than they are truly worth. This is usually because of a temporary event that the company would likely recover from like a change in government regulation or a change of management etc. If you can buy the shares of a company with a very solid previous track record for a much discounted price, you can maximise your returns. For instance, if Coca-Cola was trading at half its usual price and was likely to return to its true value over time, you would be able to buy double the amount of shares than usual, meaning your potential future growth and dividend payments are doubled.

 “The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.”

Warren Buffet

Like Warren Buffet, we at cheapskate tend to lean toward value stocks instead of growth stocks, even though astronomical gains can be made investing in growth stocks (think tesla). The reason we do this, is because we feel there’s a better chance of success with value stocks. There’s no such thing as a sure thing in investing, but we feel growth stocks face many more future unknowns than companies that are well established. When we do invest in growth stocks, we typically do it through some kind of fund. For instance, if you think a renewable energy company will beat the market, why not invest in a fund that invests in 30 renewable energy companies to diversify and protect your investment, whilst still benefiting from growth in the renewable energy sector?

With that said, here’s some examples of some growth and value stocks we invest in and why. Again, this is not financial advice and is merely a selection from our own portfolio. We conduct in depth analysis research on the stocks performance and balance sheets among other things which e would urge, but below gives a summary of why we hold their shares.

StockWhy?
Value Stock – Aviva (LSE:AV)Aviva is the UK’s second largest insurer. Its share price has been impacted through 2019 and 2020 due to brexit and Coivd-19. However, it still reported good operating profits for both years and is paying dividends. It’s current P/E ratio is much lower than average.
Value Stock – Vodaphone (LSE:VOD)Vodaphone has had a tough couple of years. With rising competition and big debt commitments, share price has nose dived. However, there are signs of turning a corner, growing its free cash flow and paying down debts. With 5g rollout underway, we think Vodaphone is a good buy.
Growth Stock – Aston Martin (LSE:AML)The story of the Aston Martin share price is tragic. After being offered on the stock market back in 2018 at £19 per share, the stock price dropped as low as 32p due to declining sales. However, with a big management shakeup by new chairman Lawrence Stroll featuring a host of exercedes employees, coupled with a new engine / equity deal with Mercedes and electric vehicles in the pipeline, we think its cheap enough to buy.

Others

Individual stocks and ETFs cover most investing, but is there anything else? There sure is! We don’t invest a great deal of our cash or time in these alternative products but that could change over time if our investing needs change. Here are some alternative investments worth checking out:

ETCs

An ETC stands for ‘exchange traded commodity’ and is similar to an ETF, in that is isn’t an actual stock of a single company. You would look to use an ETC is you would like to invest in a single commodity like gold or silver. ETCs usually replicate the spot price of gold on the market and is an easy way to buy and sell. Note – there are investment products also called commodity ETFs. Note though that these are different to ETCs. We won’t get too technical but essentially an ETFs have to be diverse by nature so will never feature a single commodity whereas ETCs can. There is a also a difference in how they are secured (ETCs usually have the physical gold or cash to back the investments in them).

We wouldn’t hesitate in future to use ETCs (we already hold small holdings in precious metal ETCs) if our investing strategy needed to shift to become more defensive.

REITs

REIT stands for ‘real estate investment trust’. They trade on the stock market exactly like a single stock. The difference is that the company you are buying owns, operates or finances commercial real estate which produce cash through rent and other income streams. The properties in question are usually large commercial like shopping centres, offices, apartments and the like. REITs can be great as they usually pay a decent dividend and have a moderate rate of return in line with the property market. In this regard, they can provide a similar return as value stocks if done correctly.

We currently have no holdings in REITs as the property market at present is severely depressed and we feel better returns could be made elsewhere. We also opt to get exposure to the property market through our own physical rental properties, though we would have no problem in investing in REITs in the future.

Other Products

There have been some some recent additions to the stock market in the form of crypto ETPs (exchange traded products). These are relatively new to the market (there is only 1 listed on T212 at time of writing, and buying is currently suspended) but we are expecting to see more and more in the future. Although we do have small holdings in cryptocurrency, we hold them physically with a cryptocurrency wallet instead of investing through an ETP.

Next Up…

Thanks for reading! next up in our investing for beginners series we talk about graduation and where to go for further learning!

Let us know your thoughts by leaving a comment below!

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