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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 #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.