Most investors can get all the investment diversification they need with certain mutual funds and ETFs. But investing in stocks can be of greater interest to some investors who seek the thrill of attempting to beat the market.

When you purchase stock, you own a piece of a company, which makes you a shareholder with voting rights. You literally have a vested interest in the company’s success.

Investing in stocks isn’t about get rich quick schemes. A long-term investor should use tried-and-true strategies. Choose the one that feels right for you.

Investing in Stocks

Buy and hold

The buy-and-hold approach to stock purchasing is fairly conservative in that the investor purchases high-quality stocks and holds on to them for years. The investor makes money when the stock appreciates in value (producing capital gains when the stock is sold) and through dividends. There is little trading involved.

Value investing

Take the “buy-and-hold” approach one step further by finding quality stock that is beaten down or undervalued due to economic conditions or changes to the company, and buying at bargain prices. This is the Warren Buffett approach to investing.

Value investing doesn’t always work, though. There are times when companies are in serious trouble and likely won’t be able to recover.

Dividend strategy

This strategy involves buying stocks in companies that pay dividends. Typically, companies that pay out high dividends are mature companies with little debt – known as “blue chips.” They are often viewed as slow-growth. However, a number of studies have shown that dividend payers perform better over time and with less volatility than non-payers.

A yield is the percentage of the dividend in relation to the value of the share price. An increasing dividend is a good sign that the company is growing its income. But, a high dividend yield doesn’t necessarily mean the underlying stock is healthy.

When comparing companies, consider both the yield and the quality of the stock. Dividends can also be cut which may be an indication that the company is in trouble. So, in general, stay away from companies that are cutting dividends.

This regular payout can be spent, or reinvested for compounded returns. DRIPs are dividend reinvestment programs. They allow you to passively grow your portfolio by reinvesting the dividends into more shares. DRIPS are not available for all stocks.

When you invest in stocks that pay dividends in a non-registered account, you benefit from the dividend tax credit.

Sector rotation

Sector rotation means you protect your assets during economic turmoil by investing in high-quality companies (e.g. banking, utilities, pipelines and railways). When the markets bounce back, you rotate your portfolio into a more aggressive position by buying more cyclical industries (such as commodities and resources) which can produce significant returns during economic recovery.

You have to be comfortable with the risks and do ample research. If you’re a conservative investor, it’s best to stay away from this strategy.

Growth companies

Stocks that are positioned for growth have the potential to produce high returns. Many are venture or start-up companies that have a new idea, product or service, especially technology oriented. These companies are considered higher risk, so they should be considered only by investors with a high-risk investment profile.

Growth strategies are based on the principle that small companies have huge potential to become big (think Apple, Google and Amazon back in the day). To profit from investing in small, growth-oriented companies, you absolutely must have research to support your decision, understand the business model, and be able to interpret financial statements properly.

A word about diversification

Whether you’re investing in stocks with a strategy of growth, value, or income, you still need to incorporate a sufficient number of stocks to diversify your risk.

A diversified portfolio contains about 20 companies, chosen for diversity in size, industry, sector and location. Much more than 20 stocks and you’re going to have a hard time keeping up with the latest news, evaluating and making informed decisions.

Wait until you can buy at least five individual stocks with a reasonable number of shares to start off with and then add more.

How to buy stocks

You can purchase stocks through a licensed investment professional who works at a stock brokerage firm, or on-line with a discount brokerage account.

In the first instance, a full-service stockbroker (investment adviser) charges a commission or fee for their advice. In the second, you invest based on your own research, without professional advice, saving fees in the process.

Shares can be purchased directly from the issuing company through a share purchase plan and a dividend reinvestment plan (DRIP) where your dividends are used to buy more shares. This is beneficial because it means your dividends are automatically reinvested. Some companies also allow employees to invest a portion of their pay directly into shares of their company.

Final thoughts

As an investor, it’s critical that you buy shares only in companies that fit your investment personality and investment needs. Honour your tolerance for risk – not someone else’s. The money you invest is never guaranteed, nor are you guaranteed any dividend payout.

One of the best ways to learn about stocks is to pick a few of your favourite companies and follow their performance for a few weeks or months. You can set up a (free) mock portfolio through most brokerages.

In part 2 we’ll look at some methods of evaluating stocks to determine which ones are best for you.

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3 Comments

  1. Pellrider on November 10, 2017 at 1:48 pm

    I like to invest in dividend stocks. I started investing in ETFs. Then switch to invest in dividend paying companies. Looking forward to your next post. I learned about investing by reading financial blogs.

  2. EngPhys on November 11, 2017 at 10:20 pm

    There’s a lot I disagree with in this post:

    “But investing in stocks can be of greater interest to some investors who seek the thrill of attempting to beat the market.” There’s no evidence that investors are more likely to beat the market long term by picking specific stocks.

    “Value Investing… this is the Warren Buffet approach”. It might be prudent to see what Warren Buffet actually said about individual investors: “The trick is not to pick the right company, the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low cost way.” (Side note – this might be better for American investors. Canadians would probably benefit from some Canadian holdings and international holdings as well as US.)

    “Dividend Strategy…However, a number of studies have shown that dividend payers perform better over time and with less volatility than non-payers.” This isn’t true: http://thebamalliance.com/blog/vanguard-debunks-dividend-myth/ (I got this link from Boomer and Echo).

    “When you invest in stocks that pay dividends in a non-registered account, you benefit from the dividend tax credit.” The dividend tax credit only applies to Canadian stocks and even with those, it is better that the money compounds untaxed rather than being paid out as a dividend and taxed.

    “Sector Rotation”. Is there any evidence people can time the market properly?
    “…you protect your assets during economic turmoil by investing in high-quality companies” Is there any evidence high quality companies do better during economic turmoil?

    “One of the best ways to learn about stocks is to pick a few of your favourite companies and follow their performance for a few weeks or months.” Is there any evidence that stocks do better because they are one of your favourite companies? And stock performance over weeks or months are meaningless numbers. You care about long term growth over years. If you care about returns within the next few weeks or months, you should not buy stocks.

    The best advice that I can give: don’t pick individual stocks. Buy a well-diversified, low cost portfolio of index funds. Get the right balance of stocks and bonds for your risk level and rebalance annually.

  3. Grant on November 12, 2017 at 7:55 pm

    Marie, I do agree with all the points made by PhysEng. It is what the evidence shows. However, dividend focused investing is a popular strategy for a number of behavioural reasons, and by focusing on dividends some investors are more able to cope with the temporary price falls that occur in a crash and avoid panic selling, which, of course, is a good thing. At the end of the day, behaviour is the most important part of investing, so finding a strategy you can stick with is the most important part even even if it doesn’t give you the best return. A reasonable strategy you can stick with is better than the best strategy you can’t stick with. Behaviour aside, though, passive indexing will give the best shot at the optimal outcome.

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