Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions.
Historically, over the long term, common stock, by means of capital growth, have yielded higher returns than most other investment. But high return involves high risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. This type of failure is known as business risk. The sector the company is in may be doing fine, yet the company still goes under. This could be due to a plethora of things such as bad leadership, ineffective marketing, and so on.
The best way to reduce or even eliminate business risk, is to own dozens or even hundreds of companies at the same time. This can be accomplished by investing in securities such as no-load mutual fund, and ETFs (Exchange Traded Fund).
This represents some degree of ownership in a company but usually doesn’t come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends which are never guaranteed.
Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good way to think of this kind of security is to see it as being in between bonds and common shares.
- Diversity is key. If you wish to invest in individual stocks, make sure you select a broad range of sectors.
- No more than 15% of the total value of your stock portfolio should be in any one sector.
- No more than 10% of the total value of your stock portfolio should be in any one stock.
- In addition to sector diversification, keep in mind that capitalization size can affect your standard deviation
- Always keep an eye on taxes when selling securities. Know what a tax swap is.
Deciding which stocks to invest in can be difficult, especially if you have a low tolerance for risk. That’s why it’s important to define your financial goals and learn how much risk can be tolerated before investing. Research stocks that fit within your strategy and invest in stocks that have the potential to help you meet your specific goals, whether you want investment growth, income, or a combination of the two.
Your Investment Consultant can provide you with a wide range of stock investing services, including:
- Asset allocation strategy development
- Individual stock selection and research
- Help in deciding when to buy and sell your stocks
- If and when to put a stop loss on trades
- Selling covered calls to generate income
- Buying puts to protect gains
- Using coaching techniques when emotions get involved