Investing in stocks can be a lucrative endeavour that can multiply your money over a period of time. To start investing in stocks without knowing the pitfalls, however, can also be a very risky affair. In what follows we aim to provide the novice investor with the necessary knowledge to get started.
How much do you start with?
When you start investing in stocks how much you invest of course depends in the fist place on your financial strength. You might be surprised to learn that you can start investing in stocks with a relatively small amount such as € 1.000 in the case of discount stockbrokers. This, however, is more suited to people who already know the basics. A full service stockbroker will usually require a higher minimum deposit – but here they will make all the tricky investment decisions on your behalf – something very useful when you start investing in stocks.
Read more: How to Start Investing with 5000 Euros?
Individual Stocks or Mutual Funds?
Your next decision will be whether to invest in individual stocks, e.g. Microsoft, or mutual funds. If you have a relatively small amount to invest and the outcome of that investment is crucial (e.g. you are approaching retirement) investing in individual stocks can be more risky. When something serious unexpectedly goes wrong with the company you can loose the bulk or even all of your money.
If you have enough capital investing in individual stocks can, however, be very lucrative – provided you follow the golden rule: to diversify as much as possible. Many experts advise that you should not invest more than let’s say 5% of your portfolio in any individual company.
Before you start investing in stocks of one or more companies, study their share price trend over a couple of years. Also scrutinize their financial statements and do a Google search to check whether the company was recently in the news for all the right (or wrong) reasons.
One alternative is to invest in a mutual fund. Here you will automatically be exposed to a wide variety of stocks, because these funds are by their nature more diversified. Some funds track a specific index, e.g. the S&P 500, while others may track a particular industry.
The downside is that you are unlikely to experience huge returns virtually overnight, which might happen with an individual stock if the company makes a breakthrough in some or other field.
Consider the Costs
Something that should always be taken into account before you start investing in stocks is the cost of trading. A brokerage can charge you a flat fee (e.g. € 5 or € 10) per transaction. If you want to invest in 10 different stocks, this will count as 10 different transactions. So you will end up paying € 50 in commissions. If you only have € 1.000 to invest, this is already 5% of your investment. And when you sell the stocks you will pay the same commissions again. It might, therefore, take a year or two just to recover these costs before you start making a profit. If you have a million dollars to invest, however, this would only amount to a negligible percentage of your investment.
With mutual funds the fee structure is different. Here you would often pay no transaction fee, but you do have to pay a certain percentage annually in respect of management fees. In some cases it’s very low, but in other cases it can be as high as 0,7%. There are often also other types of costs involved. And if you don’t want to end with a nasty surprise it’s advisable to narrow down your search to three funds and then study them in depth, including their cost structure.
Choosing a broker
We have already mentioned that broker’s minimum deposit requirements and commission structures differ. If you intend to buy and sell stocks frequently it would be wise to opt for a broker with a very low transaction fee.
With the advent of the Internet many people opt for an online broker. Be warned, however, they are not all the same. Do your research and make sure the company of your choice offers the following:
- Excellent customer support via a variety of channels. A good broker will not only offer email support, but also telephone support and an online help desk. You will only really appreciate this one day when you are facing a problem that needs to be resolved urgently.
- Trustworthy reputation. In the world of stock trading there are many fly-by-night brokerages: here today and gone tomorrow. Do some online research and choose one that has been in business for a few years and which has a reputation to protect.
- Excellent trading platform. If possible test their trading platform with a demo account. Make sure it’s user friendly and reliable.
- Free training. If you are new to stock trading, find a broker that offers decent online training in the form of tutorials and guides.
The bottom line when you start investing in stocks
If there is one golden rule you should follow when you start investing in stocks it’s this: do your homework. It makes no sense to invest your heard-earned money with any company or fund unless you find out as much about them as humanly possible.
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