Many people would like to start investing but may be hesitant due to some beliefs they hold about it. Some things you may have heard or wondered yourself might be:
- “Stocks are only for wealthy people.”
- “I can't become a shareholder because I don't have the required knowledge in regard to the stock market.”
- “The prices are too high, so it's not worth getting started.”
Many people believe that investing is only for business tycoons or tech bros, but that simply isn’t true. Anyone can increase their savings through stocks with the right knowledge and tools.
In investing, what is comfortable is rarely profitable. - Robert Arnott
Reasons to start investing
Investing your income can help your wealth to grow passively over time. Owning assets, rather than saving, can help you to make profits and outpace inflation.
You also don’t need to be wealthy to start investing. There are even stocks that cost as little as one euro.
What is stock?
Stock is a general term used to describe ownership of a company. To be a stockholder, or a partial owner, you must buy a share. A share is the smallest unit of measurement used to describe a portion of the company that you own. Imagine that a company is like a pizza, and you own one slice of it. That pizza slice is your share, or equity, of the company.
Preferred stock vs common stock
Beginner investors usually start out buying common stock, which allows for voting rights in a company. A disadvantage of common stock is that if the company goes bankrupt, you might be the last to be paid out of your share of the company. In some cases, investors don’t get their money back at all.
On the other hand, preferred stocks can grant higher dividends than common stocks and give an investor a higher chance of being paid out in the case of liquidation. Unfortunately, these stocks normally don’t allow for voting rights.
Types of stock
There are also other types of stocks to be aware of:
- Individual stocks: Shares in individual companies
- Mutual funds: A company that pools money from multiple investors and invests them in securities like stocks, bonds, gold and short-term debt
- Index funds: A basket of stocks that tracks a particular market index
- Exchange-Traded Fund (ETF): A type of pooled investment security that holds multiple underlying assets, rather than only one
Risks
Risk is how an investor makes money. Stockholders take on a certain level of risk for their investment, and sometimes they don’t pay off. For instance, companies may go bankrupt, or the market might crash. If that happens, then you could potentially lose your investment.
Alternatively, if the company’s capital increases, then you stand to make a sizeable profit.
Investing in stock vs a savings account
Imagine a 30-year-old person named Sam. Sam has a financial goal of growing his savings and wishes to put away 30 euros per month. If Sam wants to make reach this goal, he has two options.
The first is to open a savings account and deposit 30 euros of his income into the account every month. This means that, after 10 years, Sam will have accumulated 3.600 euros in his savings account. After 30 years, the amount will be 10.800 euros. However, the con is that, while savings accounts do accrue interest, the rate can be fairly low, depending on the bank.
The second option is to invest the money in a share of an Exchange-Traded Fund (ETF). This is a great option as ETFs offer low fees, easy management, and the ability to diversify your investments.
For example, investing in the iShares MSCI World ETF can yield - without the costs of the ETF itself - a valuable return of around 3,1 percent. This means that after 10 years, Sam will have accumulated 4.204,64 euros. After 30 years, the amount will have reached 17.653,29 euros. The reason that the value is higher is due to compound interest (the interest that you earn on interest).
Buy your first stock
Buying your first stock is exciting, but as mentioned it carries risk. That’s why consulting with a broker can come in handy for new investors. A broker is a person or institution that purchases and invests stocks on behalf of their investors. These brokers have knowledge regarding the stock market but can be costly and can vary in quality.
Fortunately, there are new types of online brokers - also known as neobrokers - who are revolutionising the stock market.
Reasons to invest with an online broker
Investing with an online broker has several advantages:
- The entry barriers are lower
- The transactions are quick and the fees generally low
- You have more control over your stocks
- You can track your stocks in real time
- It eliminates the need for an intermediary
- You get access to a range of trading tools and information
Start investing
Investing can be a thrilling and valuable next step in your financial journey. However, it's always important to stay informed and updated about the market and make sure you have disposable income to risk on stocks.