The name is an abbreviation for Exchange Traded Fund. Interpreting literally, an ETF is a fund in which you can invest in or sell at the stock exchange. It is a more liquid version of a fund, because Continue reading Introduction to ETFs
If you want to buy stocks, you need a special bank account for this. At least in Germany every bank I know offers this kind of accounts. The account for shares/stocks comes with an allocations account for money: If you want to buy shares, you have to transfer money on this allocation account and if you sell shares or receive dividends, the bank puts this money into your allocation account.
You can place buying or selling orders using the same channels like transferring money – you can go to the bank personally, sometime you can do it at the phone and you can do this at the online banking interface.
When you start looking for a bank to get an account for your future stocks and shares, here are some things you should keep in mind:
at standard direct banks (banks without local physical representations for customer service), you shouldn’t pay a monthly or annual fee simply for the account.
order fees below 15 € definitely are possible. For example, if I wanted to sell stocks for 2000 € at XETRA (that’s an electronic stock exchange), I would pay a total fee of 10,90 € (4,95 € + 0.25 % of 2000 € for my bank and 0,95 € for the stock exchange)
What not to do…
If you want to invest in stocks, there is one big mistake you can make:
Invest your savings and sell your stocks with losses because you panic after the stock prices dropped during a crash and want to limit your losses.
…and how to avoid it
In case you don’t know yet, how you’ll react in such a situation, you should act careful and first gain trust in the fact, that stock prices will go up again after a crash.
I learned this without intention: In August 2007 a friend of mine introduced me to a stock market simulation game that used real stock prices but only playmoney. Back then, I invested 52 000 € of playmoney in different stocks. One year later the financial crisis kicked in and I lost interest in the game when my simulated stock were worth 43 000 € in December 2008. I decided stock are not for me. Anyways, I still received the weekly updates. In 2014 I noticed, that my simulated portfolio was worth 72 000 €. Thus my stocks had an average yield of 4,7% per year even with a big market crash. At that point I realized that stocks can be a worthwhile investment after all.
There is another way to learn to handle dropping stock prices. Simply don’t invest all your money at the beginning. Start your investment strategy with an amount you could handle to lose completely. And then wait and get to know your reactions to different market situations. If you start feeling more comfortable you can increase the invested amount step by step – it’s better to miss a few market opportunities than panicking while all your savings are at risk.
What’s also helpful to avoid selling in panic is checking the development of your stocks as infrequent as possible and ignoring all news featuring stock markets and economy.
Where do you stand right now? Is there something your would like to see in future posts? Leave me a comment!
This is the first blog post on financial investments. I’m starting with stocks because they’re quite mainstream, everybody has heard of this concept and stocks are the basis for a later post on ETFs.
Before the real content of this blog post starts, please enjoy this legal disclaimer:
Keep in mind, that I am not a professional when it comes to finances and investments. It’s completely your decision, how to act on the information I am offering here. In case you want to blame someone when it’s not working out for you – start with yourself. Everything else is ridiculous 😉
This post got longer than initially intended, so I’m dividing it into two smaller ones. This one focuses on the basic ideas behind stocks with the subtopics
Stocks? What are Stocks?
The following second part is „Stock in Practice“ with the following subtopics:
How to buy stocks
What not to do and how to avoid it
Stocks? What are Stocks?
Stocks are little parts of a company or enterprise. For example in January 2017, there were 850 million Siemens stocks (850.000.000) out there. So if you own one of those, you own 850,000,000th of Siemens. Therefore you can claim the same share of the money this corporation earns.
There are two main reasons that define the characteristics of stocks. Other people who own the remaining stocks and the possibility to reinvest the current earnings in the company to increase the expected earnings
in the future. While some stockholders want to keep their stocks for a long time and are more interested in increased future earnings, other stockholders are interested in what’s happening on the short-term. They all can cast their vote at the stockholder’s meeting and decide how much of the earnings is reinvested and how much is distributed as a dividend to the stockholders. This is the money you might get.
If you think, you can get higher returns on your investments somewhere else, you can sell your shares. And if lots of other people assume the same, the stock price will decrease, until it finds a new equilibrium where the expected return on investment for this stock is equal to the expected return on other investments. On the opposite, if lots of people have positive expectations, they are willing to pay more money for each stock, until a new equilibrium is reached.
In real life, those price adaptions create the volatility of stock prices: There is lots of information out there influencing the predictions of investors. You can recognize this in the following figure.
Technically, the price development of stocks can be divided into short-term and long-term development. Again, be refered to the figure The short-term dynamics are more or less noise while the longterm developments originate from a combination of reinvesting of earnings and distribution of those earning as dividends.
Based on those different contributions to stock price development, it’s possible to classify the strategies, based on which effect they rely on.
If you’re relying on changing course, buying the stocks at low prices and selling at high prices, then you’re using a trading strategy. With this strategy it’s either lots of effort in analyzing the stocks or simply gambling. Your gains are someone else’s losses, because no value is created.
And if you take the trading fees and commissions into account, that are paid to your bank and the stock exchange, than you and the person on the other end of the transaction end up with less money. Especially if you’re competing with professionals like investment bankers (while you’re using most of your time doing actual research), then you have to decide for yourself if this is going to be your strategy 😉
Personally I’m using the buy-and-hold strategy. I’m buying the stocks, wait and do nothing for the first couple of years. By doing that, I’m avoiding giving too much money way as trading commissions. Also I don’t have to perform analyses all the time, and the time you want to invest in analysis is up to you. At the beginning, I looked for stocks of big, well-known companies (also called blue chip values) and tried to diversify over different countries and different sectors. So the analysis was more based on common knowledge than on facts. And because I only chose stocks of companies I already had heard of, I ended up with a big home bias, with lots of German and European stocks.
As mentioned in the beginning, there will be an article on stocks in practice next week. While writing this post I also noticed that I probably have to write an article on investment risks and risk management.
If you want to learn more about stocks, I’m recommending finding a podcast on financial education, financial literacy, investments or something like this and listening to I during sports, car drives or doing the chores. Podcast in the German language I’m recommending are Finanzrocker, “der Finanzwesir rockt” and zendepot.