Hey guys, it's Adrian here the Canadian in a T-Shirt and today I'll be
breaking down what is investing and how to invest in stocks. These fundamentals
of investing are useful for everybody but I will be targeting my advice
towards Millennials and Canadians in particular. I'll be covering the basics
of what are stocks, dividends and capital gains. This is the
second video in my investment series so definitely check out my last video where
I broke down the 4 key steps to become wealthy, with investing being the
last step. It's really, really important to understand steps 1 to 3 before you
dive into investing, so if you haven't seen it yet, click the pop-up on the top
right to check out that video first. As a quick recap, the 4 steps to become
wealthy are: paying off your credit card debts, reducing your spending, setting up
an emergency fund and finally, investing. So with that, let's jump into the world
of investing. Investing is anytime you set aside money today with the
expectation that you'll be able to take out more money in the future. And when I
say future I don't mean next week or even next year. Investing is a long game
people who buy and sell multiple stocks over the course of a day are not
investors. Those are day traders and I do not recommend that approach for anybody
Even if you are a licensed stock broker and you've passed your Series 7
exams, buying and selling stocks in the short term is essentially gambling and
in fact you probably have better odds going to a casino. Instead you need to
think of investing in the long term. All of the investments in my list really
show their enormous value over the course of 15, 20 or 30 years. That's a
perfect timeline for Millennials especially people in their 20s. Maybe
you're just out of school and you're entering the workforce for the first
time in that case you have 30 or 40 years ahead of you before you retire so
you really need to start investing today so you can take full advantage of these
decades of investment growth ahead of you I really want to hammer home the
point about investing in the long term the general consensus is that investing
the stock market is risky and you could lose all of your money at the drop of
a hat, but that is only really true if you're investing in the short term. Here
I have a table showing different time frames and whether the US stock market
gained or lost money between 1926 and 2015. Over the course of these 90 years
about 54% of the days, the market went up and about 46% of the days, the market
went down so if you're buying a stock today and you're selling it tomorrow you
basically have a 50/50 chance of losing money but if we look at a one-year time
frame 74% of the years saw the market go up since 1926. The story gets even better
if we look at a 10-year time frame 94% of these ten-year time frames the market
made money so if you invest in the stock market and you hold on to those stocks
for 10 years you have a 94% chance of gaining money and looking at
the 20-year periods there has never been a single 20 year period in the history
of the stock market that didn't see a positive gain even through the Great
Depression of the 30s or the financial crash of 2008 the stock market has never
lost money over the course of 20 years so if you are a young investor and you
invest in a diversified portfolio for 30 to 40 years until you retire you are
historically guaranteed to make a profit and a considerable one at that. I like to
think of investing as planting a seed after a week if you come back and dig it
up all you'll have is just a seed but if you give it time and you let it grow
after ten years that seed has become an apple tree and now you can reap in the
rewards of your investment and you can cash in all the apples that you have or
even better you can let that tree be let the apples fall and those apples will
plant new seeds in the ground every year your tree will plant new seeds and those
new trees will plant new seeds and now after 30 years you're one single seed
has become a whole orchard of trees and that's the mentality I want you to have
with all of your investments. Whenever you have a profit
don't just cash it out reinvest that profit and let your investment compound
and grow faster and faster that's how your investments can give you
exponential growth and the true power of exponential growth is letting it run for
a long period of time here's another really important point do not invest
with money that you'll be needing in the next year or so if you know that you're
buying a house next year or you're going to be going to university in a few
months do not put that money in any form of investment instead put that money
in a savings account where you can earn a modest 2% interest rate but that money
is guaranteed to grow in value and more importantly it's guaranteed not to lose
value you can withdraw that money from the savings account at any time at all and
it will never go down in value the money that you put into investments should be
money that you're not planning to touch until at least 10 years
ideally until you retire so with that let's jump into the type of investments
the building blocks of most investments are securities and securities are either
stocks or bonds in today's video I'll only be focusing on stocks a stock
represents a unit of ownership of a company if a company like Walmart has a
100 stocks available and you own 10 of these stocks that means that you own
10% of Walmart and so you are entitled to 10% of Walmart's profits these
units of ownership are bought and sold with other investments over the stock
market these stock markets include the New York Stock Exchange for American
companies and the Toronto Stock Exchange for Canadian companies the interesting
thing is that a stock this unit of ownership does not have any inherent
value the value of a stock is how much someone else is willing to buy it for
that's why the value of a company's stock changes every second of every day
even if nothing is changing about the company an hour from now if enough
people are offering to pay more for the same stock now that stock is worth more
and its value increases even though nothing real has changed so when you
look at a stock's value over the course of a day these random fluctuations are
meaningless what we actually care about is the long term growth of a stock over
the course of years this represents real growth within a company for example this
is the value of Apple stock over the course of a day these fluctuations mean
absolutely nothing some people were just willing to buy and sell for $1 higher or
lower than other investors nothing actually happened to Apple as a company
to explain this fluctuation but if we look at Apple stock over 15 years we can
see that after 2008 when the original iPhone was released and gaining
popularity Apple stock saw incredible and consistent
growth year after year until today in 2019 when the stock of Apple is worth 10
times what it was back in 2008 this is the real kind of growth that we care
about as investors ignore the short-term fluctuations pay attention to the
long-term growth another thing to note is that you probably hear the words
shares stocks and equities. All of them mean the same thing it's just a
way to describe a single unit of ownership of a company stocks can earn
you money in two ways capital gains and dividends capital gains means that the
stock themselves are worth more today than the price you bought them for so
view bought 10 stocks of facebook at $200 each your initial investment is
$2,000 fast-forward 5 years and now Facebook stock is worth $300
You still own those same 10 shares of Facebook but now each one's
worth $300 so now your total investment in facebook is worth $3,000 that's
$1,000 more than you bought it for here is a very important point though you
have not made a $1,000 profit just yet your stock is worth $3,000 but you don't
get any of this money until you decide to cash out and sell your stock this
concept is extremely important but even more so when stocks drop in value let's
say that there was another data privacy scandal and Facebook stock value
plummeted to $150 now your 10 shares are only worth $1,500 that's $500 less than
you bought it for you might be worried then you just lost $500 with this
investment but you really haven't yet you haven't lost any money until you
decide to sell your stocks the moment when you sell your stocks that's when
your gains or losses become realized until you actually sell that $500 loss
is just a fictional number telling you what you would get if you were to sell
today but you don't have to sell instead hold on to those 10 shares you have and
after about a year Facebook stock will most likely bounce back up and you'll be
out of profit again the value of your shares is a fictional hypothetical
amount the actual true value of your investment is the number of shares that
you own so that's how capital gains works the most basic way to make money
with stocks the second way to make money with stocks is dividends the
are a percentage of the profits that a company pays out to its investors going
back to the Walmart example if you own 10% of Walmart stocks you own 10% of
Walmart and so every three months or every quarter Walmart will pay you up to
10% of its profits and this is called a dividend the best part is you
don't have to do anything to earn this money if you own at least one stock the
company will pay you dividends and the more stocks you own the more dividends
you'll get dividends are a great way to encourage investors to invest in the
long run with capital gains you only earn money when you sell your stocks at
a profit but with dividends, you get paid every few months whether the stock goes
up or down so if you held on to TD stock for five years and over those five years
the value of its stock remained flat then when you sell it you haven't earned
any capital gains but every three months TD has been paying you a dividend in
cash and so over the course of these five years you've still made a profit
because of these dividends ideally you want to take advantage of both dividends
and capital gains that means you want to invest in the company that pays you a
dividend every few months and a company whose value grows a year after a year
unfortunately there aren't that many companies that do both in fact there are
a lot of companies that don't pay a dividend at all these are usually new
companies who aren't making enough of a profit yet to justify paying out
dividends or they could be tech companies like Apple Facebook or Amazon
which pay little or no dividends at all the rationale here is that these tech
companies would rather invest their profits into research so that they could
develop a whole new product to release in a year or two and this research and
new product line should increase the value of the company significantly and
so the investor should be earning more money through this capital gain than
they would if they had receive dividends instead sometimes this trade-off is
justified and other times it's not but you have to be prepared for the fact
that some companies just don't pay dividends and some companies can decide
to stop paying dividends since dividends are more or less optional for a company
we can divide stocks into two main categories growth stocks and dividend
stocks stocks are companies which pay no
dividend or they pay such a small dividend that it's essentially
negligible again these are companies which would rather invest in themselves
to grow research a new product line or expand into a new market when investing
in these growth stocks your only goal is capital gains that means you want to buy
these growth stocks at a low price and sell them years later at a higher price
growth stocks include new companies which are just starting out like Tesla
and Shopify but they also include older and larger tech companies like Apple and
Microsoft on the other hand dividend stocks are companies which are known for
paying significant dividends and for increasing their dividends over the
years these are usually well established industry leaders that we call blue chip
stocks these companies are worth tens of billions of dollars and they've been
around for decades because they're already so large there isn't a whole lot
of room for growth they're still extremely profitable but they're not
going to quadruple in size the way a new company like Netflix did instead these
companies attract investors by consistently paying dividends every
month or every quarter dividend stocks are generally much much safer than
growth stocks because these companies are so well established still it's
possible for a huge Titan to fall like Blockbuster Enron and Nortel but these
are incredibly rare dividend stocks are well established companies which are
staples of the industry and reliably make profits no matter what happens in
the markets these include banks like TD and BMO energy and utility companies
like Enbridge telecommunication companies like Bell or Rogers and
consumer goods manufacturers like Coca-cola or Procter & Gamble. The strategy
with dividend investing is to buy a company which has a long history of
paying dividends and a long history of increasing its dividends every year for
example the Bank of Montreal here in Canada has never missed a dividend
payment in 190 years. Ever since 1829 BMO has paid out
dividends to its investors every single quarter and every year BMO increases its
dividends I personally love dividend stocks especially in my non taxable
accounts like my TFSA and RRSP for Canadians and
I'll be making dozens of videos about how to choose a good dividend stock and
which kind of account you should put these dividend stocks in but I do want
to give you guys one warning right off the bat do not invest in a company just
because they offer a huge dividend most of my favorite dividend stocks pay out
dividends between 4 and 6% anything more than a 6%
dividend is a cause for concern there are some companies out there which are
in financial trouble and they are desperate for investors to help them out
and one way to attract foolish investors is to offer ridiculous dividends like
15 or 20% sure this gets my attention and on paper it looks like
this company will be paying me 20% of my investment each and every
year in dividends but if you dive deep into the financials you'll see that
there's no way this company can sustain these dividends in a lot of cases you'll
see that these companies are paying more than double their income out to
dividends to attract investors so every year these companies are losing money
and digging themselves deeper and deeper into debt until eventually they'll have
to cut their dividends or even worse they'll have to file for bankruptcy this
topic deserves a video on its own but I really wanted to quickly give you guys
that warning before you get super excited and start chasing those
ridiculously high dividends so there you have it there's my quick intro into the
world of stock market investing I hope I gave you a solid understanding of why
it's important to invest in the long term how to gain money through capital
gains and dividends and the difference between growth stocks and dividend
stocks I'll be making dozens of videos about how to choose a stock how to read
a stock market quote how to actually buy a stock through an online broker and how
to manage your stocks to minimize taxes and fees I'll be releasing these stock
focused videos very soon but first I want to continue with my investment series
where I'll be comparing the different types of investments I'll be talking
about stocks versus bonds mutual funds vs. ETFs and how to build a diversified
portfolio thanks for watching guys and be sure to like comment and subscribe if
you found this video helpful I'll be releasing a new video every Thursday and
let me know in the comments below what are some of your favorite growth or
dividend stocks? Be sure to tune into my next video where I'll be breaking down
the difference between stocks and bonds and I'll be the
seeing the importance of asset allocation thanks everyone and I'll see
you guys on the next episode of The Canadian in a T-shirt bye guys