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Investment #7 – Call Options

Katie loves Este Lauder (EL) products and thinks that the price of EL shares will go up. Marissa currently owns EL shares, but thinks that the price will either stay the same or go down in the future. The girls talk, and decide to write up a call option.

Call Option

An agreement that gives an investor the right, but not the obligation, to buy an asset at a specified price within a specific time period.

Right now, each EL share is priced at 10$. Marissa writes up a call option agreeing to give Katie 100 shares of EL at 12$ per share in a month. The fee that Katie pays for the option (aka premium), is 200$ (the 2$ per stock difference times 100 shares).

If the price of EL shares shoots up to 15$ in a month, Katie can exercise the option and buy Marissa’s 100 shares of EL at only 12$. Since Katie is getting the shares for 3$ less than the actual price, she makes $300 (3$ x 100 shares) minus the initial fee of $200, resulting in a net profit of $100.

If the price of EL shares go down to 8$, Katie will not chose to exercise the option (she won’t buy the 100 shares), and will simply loses the $200 initial fee she paid at the start.

Call options allow individuals to speculate about stocks that they do not own. If you believe a certain company or asset will go up in the future, you might want to consider a call option!

Investment #5 – Real Estate

Allison just made $83,000 from a $20,000 investment. Ten years ago, she had bought an apartment as a real estate investment.

Real Estate Investment

Properties that generate income for a buyer and that are bought to make money, not to live in.

When Allison bought the house 10 years ago, she planned to rent it out and then eventually resell it for more than she had bought it. This way, she would make money from the monthly rent payments, and the increase in property value.

So how exactly did she make $83,000 from only $20,000 with this investment? Here’s how:  

Allison bought the house for $100,000 using $20,000 of her own money and $80,000 that she borrowed from the bank at a 3% annual interest rate. This means that until Allison paid back the $80,000 loan to the bank, she’d have to give them $3,000 per year or $200 per month.

But that was easy, because by renting out the apartment, she received $1,000 per month – enough to pay the bank $200 and enough to keep $800 to herself. She continued to do this for 10 years, until she saved up $96,000 to herself ($800 x 12 x 10)!

During this time, the value of the apartment had also gone up from $100,000 to $120,000. She sold the apartment, and ended up with $120,000 + $96,000 = $216,000! Of course, Allison had to pay back the $80,000 she had borrowed from the bank. Also, since she made profit from this investment, she had to pay taxes of $33,000, leaving her with $103,000. After removing the initial $20,000 that Allison had invested of her own money, Allison has made a $83,000 profit from this investment… wow!

Of course, as a property owner, Allison was responsible for maintenance, finding tenants, collecting rent, etc. So there are other difficulties and expenses to consider. Also, the house market can go up or down. So, the risk of the apartment decreasing in value was also possible. Luckily for Allison, everything went as planned and she was able to make a lot of money from this investment.

Investing in real estate is one of the most popular types of investments, as it can provide you with huge returns! But like every investment, there are always risks to consider.

Would you invest in real estate? Let us know in the comments below!

Investment #4 – ETFs

Victoria is an environmentalist, and is really interested in the green energy sector. Because of increasing Global Warming and other research, she believes the green energy sector will grow a lot over the next decade.

Victoria is interested in investing the little money she has in one of her favourite green companies. But the problem is… there are just too many to choose from! So, Victoria decides to invest in a green energy ETF.

ETF (exchange traded fund)

An investment fund that trades on the stock market. Just like mutual funds, it is a pool of money from different investors that purchases and invests in a variety of securities.

Just like mutual funds, ETFs invests the fund’s money into different securities (stocks, bonds, etc.), providing investors with diversification. In addition, ETFs are traded on the stock exchange, making them very easy to buy and sell.

So why would Victoria chose to invest in an ETF over other alternatives? Well, there are a variety of ETFs to choose from; some ETFs invest in stocks & bonds, some replicate the performance of an entire stock market (stock index), and others replicate the performance of a specific industry sector… In Victoria’s case, she can invest in a Green Energy ETF, which replicates the performance of all of her favourite green energy companies put together.

Overall, Victoria likes ETFs because:

  • It’s an easy way to get a diversified portfolio (less risky)
  • It’s easy to buy and sell on the stock market
  • It allows her to invest in a wide variety of investments
  • There are no management fees and very low transaction fees  

So how will this let Victoria to grow her money? When the fund’s assets (stocks, bonds, etc.) rise in value, so does the value of her ETF shares. In this case, she can sell her shares at a profit. The ETF also pays out dividends to Victoria, which is a portion of the fund’s earnings.

Of course, if the fund’s assets go down in value, so does the value of the ETF shares. Therefore, Victoria makes sure to do research in advance to ensure that the fund’s securities (companies) are good ones!

 

Which industry would you invest your money in?

Investment #3 – Mutual Funds

Every Monday night, Mila and her girl friends get together to watch the Bachelorette. Before the show starts, Mila asks her friends for investing advice. She’s new to investing and wants to start, but she doesn’t have the time to spend hours doing research on her own. Her friend Alexa suggests she checks out mutual funds.

Mutual Funds

A collective investment – a pool of money from a bunch of different investors that purchases and invests in a variety of securities.

Alexa explains that her and the other girls are all currently investing their money in the Super Sexy Finance Fund (SSFF). Here, all of their money is pooled together, and managed by an expert from the Super Sexy Bank. The expert from the Super Sexy Bank takes the money from the fund, and invests it in a bunch of different securities (stocks, bonds, etc.). This is known as the portfolio.

Portfolio:

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents,

This expert constantly manages the portfolio, buying and selling different stocks and bonds overtime, while the girls sit back and relax. If Mila decides to buy a share in the SSFF, she’ll have a small stake of all investments included in the fund. This is great because it allows Mila to invest in a diversified portfolio, without having to spend a bunch of time doing her own research.

The girls love this type of investment for 3 main reasons:

  1. It’s a simple way to have a diversified investment (less risky)
  2. It’s managed by an expert, therefore saving you time
  3. It allows each girl to invest in a wide variety of investments

So…how do the girls make money? Mila asks.

Well, it’s simple. When the fund’s assets (stocks & bonds) rise in value, so does the value of the SSFF shares. This way, the girls can sell their shares at a profit. The SSFF fund also gives out dividends, which is a portion of the fund’s earnings.

Of course, if the fund’s assets go down in value, so does the value of the SSFF shares. So it’s important to make sure your expert knows what their doing!  It is also important to note that when buying an SSFF share, Mila will have to pay management fees & transactions fees to the Super Sexy Bank expert for his services.

As Mila is looking to invest without spending too much of her own time doing research, this is a perfect investment option for her!

 

What do you think? Is this a type of investment you would like to make?

Investment #2 – Bonds

With Fashion Week around the corner, the city of New York is thinking of opening a new high-end mall to feature all of the new designers and their clothing lines. In order to build the mall, the city of New York needs to borrow money. But instead of borrowing money from the bank, it decides to borrow money from the public, with the issuance of “bonds”.

Bonds:

A loan given to a company or government from an investor (like you).

So why would someone like you give money to the city of New York to build a mall? What do you get out of it? A lot actually. When you decide to lend money to the city of New York, the city of New York will pay you an annual interest rate as a “thank you” for lending them the money in the first place. Once the mall is built, they will give you back your initial payment in full.

For example, the city of New York is offering bonds priced at $1,000 over a 10-year period in exchange for 5% annual interest rate.

So, after paying $1,000 for a bond, you will receive $50 every year for 10 years. Once the 10 years is up, you will get your $1,000 back. Therefore, you made $500 profit from investing $1,000… Not bad right!

The par value (initial price) of your bond is 1000$ with a coupon rate of 5% (yearly interest rate) and a 10 year maturity date.

Buying a bond is a smart way to preserve your money while letting it grow on its own! Bonds are also viewed as safer investing options compared to stocks, since you know exactly how much to expect. Of course, like any investment, bonds still have risk. The risk is much lower than other alternatives, but there is always a possibility that the company or government goes bankrupt and can’t pay back the initial payment (aka default risk).

Usually, institutions with higher default risk provide higher interest rates per year (like corporations) while safer companies provide lower interest rates per year (like governments).

All in all, if you’re looking for a safe investment with stable returns, you might want to consider investing in a secure bond. It’s a great way to preserve your money while letting it grow in your sleep!

Would you invest in a bond? Let us know below!

Investment #1 – Stocks

Anna loves sports. She does Yoga on Monday and Wednesday and goes for 5k runs two times a week. Neighbours recognize Anna because of her trendy sport equipment. She prefers the latest outfits of winfit – a pink multifunctional bra which suits perfectly to her aerodynamic running shoes. When Anna meets her friends for dinner, they often talk about the latest sports footwear and apparel trends. She follows winfits blogs and is the first in line when a new sneaker is released in stores.

I met Anna two years ago and wondered if she also holds stocks of winfit. Anna admired winfit and was quite enthusiastic about winfit’s futures success. However, she never heard of stocks or public listings.

Winfit is a publicly listed company, which means that the company’s stocks are freely traded on the stock exchange. Examples of other publicly listed sport companies are Nike, Puma or Adidas. By buying winfits stocks,  Anna is able to own shares of the company, becoming a shareholder of winfit – she owns a part of the company. The more stocks of winfit Anna acquires, the greater becomes her ownership stake in the company.

Stocks:
Stocks are ownership certificates of any publicly listed company.

So what’s good about Anna holding winfit stocks?

Owning stocks comes along with three major benefits for Anna. Firstly, she might receive dividends (money) when the company makes profits.

Dividend:
A sum of money paid regularly (typically annually) by a company to its shareholders out of its profits.

Secondly, Anna has the right to vote in shareholder meetings. At such meetings, shareholders get information on the company’s financials and can vote for the new board of directors. And guess what – Anna’s vote counts for more, the more stocks she holds.

Thirdly, Anna has the right to sell her shares to someone else, and profit from this sale. How can Anna benefit or profit from selling her shares? This will be explained in another blogpost (here).

Pretty simple, right? Now that you understand the basics of stocks you might wonder – why would companies like winfit want to offer its shares to the public? Find out in our next article here.

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Finding Your Inner Investor

Before you join the exciting life of investing, it’s important to determine what type of investor you want to be. Just like selecting your ideal character in a video game, you need to first consider which goals you plan to achieve.

 

Timeline

How long do you want to hold a particular investment? Are you planning on making short-term returns that you can use later in the year, or do you want to let your money accumulate so you can fully reap the benefits in the long-term?

 

Risk Level

All investing includes risk in one way or the other. Are you able to watch your investment fluctuate and go up and down in value? Your risk level will likely be determined by how urgently you need the money. If you’re approaching retirement,  it probably isn’t the best idea to invest in something with high fluctuation potential. However if you’re in your 20s or 30s saving for the long-term, you shouldn’t care as much about the volatility of your investments.

 

Frequency

How often do you want to be checking up on your investment? Do you want to buy something, continue on with life and check back on the investment months or years down the road? Or do you want to be continuously monitoring the investment and taking advantage of any potential opportunity that arises?

 

Knowledge Consumption

What is your willingness to learn everything you need to know about a certain investment? Some investments are made super simple, while other demand more study time. Do you want to become an expert in a certain type of investment? Or do you want to keep it basic and and continue on with your daily activities?

 

You’re in control of who you want to be as a person and an investor.

So the question is:

What type of investor do you want to be? Write us your thoughts down below! 

 

Welcome to Investing!

Let’s start with the basics. What does “investing” even mean?

Investing:

The act of spending money into something with the expectation of getting more money out of it.

It’s that simple.

Investing is about prioritizing your money, and “working smarter, not harder”. It’s a way to let your money grow in your sleep, vs. working full-time to make ends meet.

We all know the instant gratification we get when we purchase something we want, whether it be new pair of shoes, a cute outfit, a vacation, etc. Yet it isn’t long before that pleasure wears off and suddenly your wallet seems a whole lot smaller.

Investing on the other hand, allows you to set your money aside, and let that money work for you while you enjoy life. It is the aim to purchase something that will give you even more money than you had spent in the first place. It’s a type of purchase that will excite you not only from the moment you buy it, but as long as you have it.

You work hard enough, it’s time to make your money work for you.

Investing – An example:

Kanye West is launching another “Yeezy shoe giveaway” contest. Here, 100 winners are given the opportunity to buy one of 100 pairs of Yeezy shoes at 200$. As an investment, you would buy one of these pairs of shoes (at 200$) in the hopes of selling these on eBay for much more.