Students frequently ask me questions regarding getting started in investing. My first disclaimer to them and to you as a reader is that, when making ANY decision about investing your money, ALWAYS consult with a licensed investment professional. I am NOT one of those and, as Financial Social Workers, we are careful to advise our clients to seek out the real experts when dealing with the issues of finance, the law, and so on.
Having said that, my role is to explain basic financial and investing concepts and advise students and others how to go about selecting a qualified investment professional. In today’s low interest rate environment and following up of the previous blog post, putting our money in a bank savings account is most definitely not going to allow us to outpace inflation. With no disrespect to the banks…well, maybe at least a little disrespect, once you tack on the numerous bank FEES, you very clearly will not get ahead with a standard bank savings account.
The problem, of course, is that the one thing you DO get with a bank that is not available for most other investments is security – a guarantee that your deposit is protected, in this case by the FDIC. So once we venture outside of banks and into the world of investing, we are exposed to RISK. Examples of the most obvious risks are the volatility and uncertainty of the stock market, real estate, previous metals, and so on. We deal with licensed investment advisors because we know those experts are required to inform and advise us about risk. In fact, one of the first things your advisor will do is determine your risk tolerance. We’ll cover that topic in a separate posting, but just know that money can be made or lost, so the concept of risk and reward is very much in play here.
Opportunities to make money through investment in stocks include the obvious “buy low, sell high” approach, the more patient “buy and hold” approach for the long term and numerous other strategies, including some that are very complex – all carrying various degrees of risk. One additional way to benefit from stock ownership is investing in companies that pay dividends. Dividends are the portion of the company’s profits that are paid to the owners of the company. Naturally, companies keep enough working capital to allow for growth, but beyond that the dividends are paid to shareholders on a quarterly basis.
Just owning a share of a dividend-paying stock means that you will receive a quarterly dividend on a per share basis, BUT only if the company is profitable and the Board of Directors approves the dividend. There are many resources for researching dividend-paying stocks. One of the most comprehensive and cheesiest is the Dividend Detective, which lists dividend paying stocks and their current returns as a percentage of the share price.
In my next post, we’ll look at how dividends work and how they are different from interest.