Quote:
Originally Posted by peter12
Did somebody actually recommend buying a Canadian Bank Stock?
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Yes. I did.
I suggested it as a "training wheels" stock that's easy to understand and great for a diversified portfolio and gives dividends.
It's not a golden rule. I am not suggesting having a portfolio completely full of bank stocks.
Unlike mutual funds and GICs for which I've seen some individuals use as a starting point but never departing from them because they are so horribly complex that they don't know what they own except "it's a good one". Such risk averse individuals view stocks as more complex and scary and never ever buy them. I suggest bank stocks as a starting point.
Bank stock
- Easy to understand how the operations work for bank to make money. Bank takes interest, NSF fees, credit card income, mortgage interest and also invests on occasion too.
- Brand is well known. Not obscure.
- Company not going to randomly go under as far as everyone is concerned.
- Price moves more logically in terms of news stories. (vs some stocks, earnings down, but price up. Why? Explain other random reasons price fluctuates like stock buy back, outside investors etc... too much in one go to learn)
- Gives dividends. First time investor doesn't feel so bad watching price fluctuate if they get dividends.
- If you hold it super long term, the likelihood of losing money IMO is generally low.
I suggested to some friends $1000 of a bank stock to start off in their TFSA. An amount they should be comfortable with completely losing as "tuition", but enough to learn how a stock works, and the ability to say they own a stock and finally move away from 5-6 years worth of mutual funds and GICs. They're usually ok with choosing that as a starting point vs some other random crazy company they don't understand.
Furthermore, this I use this merely as a starting point to get comfortable with stocks for individuals who often don't understand businesses like you and I may. Once they are more comfortable, I often suggest they talk to a financial advisor (usually a friend) to understand their own finances before they start throwing money into stocks willy nilly. Otherwise, "You're doing something no different than throwing money away at a casino" is what I say.
I suggest bank stocks because it seems like a controlled environment without too much complexity and isn't over whelming.