When you buy a stock, you're buying a small piece — or a share — of a company.
We believe stocks, and the mutual funds and exchange-traded funds (ETFs) that own them, can be an important part of an investment strategy. As a stock investor, there are two basic ways you can make money:
Capital gains – The first way stock investors make money is through growth or capital gains. This means that if the stock price goes up, your shares are worth more. So if you sell them for more than you paid for them, you keep the difference, which is referred to as a capital gain. The price of a stock goes up and down, so if you sell your shares for less than what you paid for them, then the result would be a capital loss.
Dividends – The second is by receiving a dividend from the company. Dividends are simply a little piece of the company's profits, typically paid quarterly. Companies don't have to pay dividends to their shareholders, but many times they do. It's important to note that even companies that have historically paid a dividend can stop at any time.
Stocks can play an important role in your portfolio for a variety of reasons, including:
- Current or future income needs
- Potential for growth of principal and accumulation of wealth
- Potential for offsetting inflation
So many choices
With more than 65,000 stocks available around the world, it can be difficult to select the right ones for you. At Edward Jones, we're very selective about the types of stocks we recommend. We use a disciplined approach to find those that align with our investment philosophy and recommend you:
- Stick with quality
- Invest for the long term
Quality: Our do's and don'ts
Because we're committed to quality investments, we don't promote the hottest, newest stock you heard about on TV last night. Over time, we've found that most people who go down that path are disappointed. That's why you may actually hear your financial advisor say "no." There are investments we just won't sell, like penny stocks, commodities and options. We believe there's too much risk.
Here's why we believe in quality:
Total stock returns – Companies that we believe can produce both current dividends and long-term dividend growth offer greater consistency and less volatility than lower-quality, non-dividend-paying stocks.
Resilience in down markets – We believe higher-quality companies usually are able to generate more consistent earnings and dividend growth. Historically, this has helped them perform better during down markets.
Diversification - Don't put all your eggs in one basket
Diversification is a strategy to help make sure your investments aren't concentrated in a certain type or area. For example, an industry can experience a "bubble" where stocks become overpriced and don't really have any track record to speak of. But thousands of investors may put a huge amount of their stock money into shares in that industry. When the bubble bursts, these investors lose their principal. Spreading your money among many different sectors can help reduce your risk. Here are our suggestions for your stock allocation:
Canadian recommended sector weightings
Source: Edward Jones Investment Policy Committee.
Long-term perspective - Time can be on your side
Quality and diversification work only if you hold your investments through both good and bad markets. Even quality stocks can go down if the market drops, which may cause you to second-guess your strategy. Don't. Focus on the long-term and remain disciplined during short-term market volatility. Remember why you're investing and talk with your Edward Jones advisor.
We recommend a few strategies to help you maintain discipline and a longer-term perspective.
Systematically invest – Try to invest regularly when you have the money available. Don't wait for the "perfect" time to put money in the stock market. This strategy allows you to buy more shares when prices are lower and fewer shares when prices are higher. This is the best way we know to "buy low."
Reinvest dividends – If you don't need the income, reinvest your dividends into the same or another investment – whatever is appropriate. This can help build up the number of shares you own in either stocks or mutual funds. That way, when the market is down, you are buying more shares.
We can help
It's important to talk with your Edward Jones financial advisor about what's appropriate for your specific circumstances. This includes a discussion about what your goals are, when you want to reach them and how much risk you're comfortable taking to get there.