š± Welcome to (or back to <3) Sprouts Finance. If we havenāt met, Iām Brussel Sprout and I like to replace the toilet roll when itās empty. Who said finance couldnāt be fun? Letās gooooo š
Estimated reading time: 4 minutes and 24 seconds
Today weāre getting into some basics about stocks (the investing kind, not the delicious food staple). What are they? Where do they come from? How are they?š„² With all our love letters, weāve got a few questions at the bottom for you to test your knowledge too.
šµļøāāļøFact of the day easy focaccia recipe #iwdfcfftdphk
šDefinition: what is a stock or share?
šTypes: what are the different types of stocks out there?
š½Life: are we alone in the universe? idk probably not but like also maybe?
Key takeaways:
š”Stocks represent ownership in a company and can be traded in a market
š”Market capitalisation is the price of a stock multiplied by the number of existing stocks
š”Common stocks provide voting rights while preferred stocks get paid out first if a company goes bustĀ
FACT CHECK
š¤Æ Fact of the day
1 (1/4 oz / 7g) envelope active dry yeast
6 cups bread flour (24oz / 780g)
2 tablespoons Diamond Crystal kosher salt (0.6oz / 17g)
1/2 cup extra-virgin olive oil (5oz / 110g), plus 1/4 cup for topping plain focaccia and more for oiling hands
Knead, Rest, Fold, Rest, Bake, Enjoy š„ source
š¬Recap
Quick-fire recap on Bean Sproutās post last week.
š”Investing can have multiple goals, including to generate income and/or capital growth
š”Frameworks outlining objective, time horizon and risk tolerance can help build an investing strategy and mitigate risk
Hereās a link to last weekās post if you want to read more!
WHAT ARE STOCKS?
Stocks or shares will probably be one of the first financial instruments you will run into. Theyāre those ones that Chad from Alpha Kappa Kappa got a hot tip on from his cousin who works on Wall Street.š„In short they are assets that represent partial āownershipā in a company. Congrats! Youāre like a teeny tiny boss of Google!
Different types of stocks will give you certain rights and weāll cover that in a bit, but a key one is the entitlement to a dividend. A dividend is when a company redistributes profits to its shareholders and is a common strategy for (less aggressive) investors to make money. Another one is through an increase in the value of the stock (you can find out more in last week's post). Now remember there are always levels to the game and not all stocks are created equal.
You already knew we were going to use this memeā¦
So like, why stonks right?Ā
Stocks are issued by companies to raise funds and operate their business. It is in essence a form of crowdsourcing to support business endeavours with the promise for a share of profit to investors in the future.Ā
You might hear some fin bros, like our dear friend Chad, say market cap(italisation) here or there, and it is used to understand the value of a business. The market value or capitalisation of a company is calculated by the sum of all of its outstanding shares at its current market price. Total shares x market price = market cap(italisation).
Thx, Chad.
WHAT TYPES OF STOCKS ARE THERE?
Answer; lots.Ā
Letās go through a few basic ones starting with common and preferred stocks. Common stocks are sometimes called ordinary shares and entitle the owner to voting rights on board members and policies as well as a share of profits through dividends. Preferred stocks or preference shares do not have voting rights but will be repaid first if a company goes bust. Like I said, there are levels (by Avicii).
Blue chip stocks are going to be your big fish.š These are the stocks of well-established, sector-leading companies that have massive market caps. Think about brands like CBA, BHP and Walmart. These are considered conservative and can generate small but consistent returns. They usually pay higher dividends too.Ā
You might hear some blue chips be called large cap stocks as well, Iām talking over $10 billion large (market cap). Naturally there are then mid cap ($2 - $10b) and small cap ($300m - $2b) stocks as well. In general, the larger the cap the less sensitivity and so we wouldnāt see massive swings in stock price. Hopefully you are starting to see how your stock selection should fit your risk tolerance and investing goals.
Finally we have penny stocks. They are considered highly speculative and are priced under $5. They are considered risky because a $1 dollar change from $5 would be a 20% increase versus a $1 change from $100 which would only represent 1%. These shot to fame in The Wolf of Wall Street for scamming, there are however platforms out there to help evaluate these risks.
BEANšBRUSSEL SPROUT BREAKDOWN: STRATEGY BUILDING
So which of these juicy stonks fit your plan?Ā
Am I after steady growth and income from dividends?Ā
Or maybe Iām ok in seeing some potentially big swings in my stock value?Ā
Itās all a balancing act and we have to keep in mind our north star of what we want to achieve. Consider your risk tolerance and how much you are able to invest and what level of change up or down you are able to accept.
Clear eyes, full hearts, canāt lose. Next week we get a little deeper and chat about how to access stocks and stock indexes.
Q&A
As always, weāve got some questions/answers below for you to test your knowledge.
šāāļø Fill in the blank
āA stock is an asset that provides voting rights and ownership in a ____Ā
building
company
soup base
āMarket capitalisation is the total number of a companyās ____ multiplied by the price
employees
beans
stocks
āLarge cap stocks usually offer ____ price fluctuations but ____ dividend returns.
low, high
high, low
low-low-low-low-low-low-low-lowšµ
š Answers
company, stocks, low-high
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DISCLAIMER:
None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.Ā