What are the basics of stocks 1
Stocks for Beginners - Tips and Pitfalls
Annette de los Santos, April 30th, 2021
Shares as a financial investment are becoming more popular in Germany, as more and more Germans have dared to go public in recent years. There are now over 12 million people in Germany as shareholders. In 2020, the shareholder quota based on the total population was 17.5%. (Source: Deutsches Aktieninstitut).
In the following article we will examine how you can invest in stocks and earn money in the process, which requirements are necessary and how to avoid pitfalls.
What are stocks?
Legal persons are subject to the provisions of the Stock Corporation Act. The Share capital von AGs and KGaAs is divided into shares, which have a so-called nominal value and which certify a certain proportion of the share capital.
Stock corporations and limited partnerships based on stocks can or do not have to be listed on the stock exchange. Only shares of AGs and KGaAs listed on the stock exchange are freely tradable. Limited partnerships based on shares are relatively rare, a well-known example in Germany is the Henkel company. Most of the stocks traded on the stock exchange are shares in public companies.
One distinguishes Bearer shares other Registered shares. Both are securities with the difference that registered shares are made out in the name of the holder.
What is a dividend?
From the investor's point of view, the dividend is the return on the capital invested. Shares grant the right to one dividend, i.e. once a year the general meeting of all shareholders entitled to vote decides on the distribution of the previous year's result, provided that it is positive. The shareholders with voting rights are the holders of common shares.
The shareholders with voting rights are the holders of common shares. Some companies (e.g. Volkswagen AG) also issue so-called Preference shares. Preference shares do not grant voting rights, but you will receive a slightly higher dividend.
Shares are securities that have a “coat”, that is the share itself, and a “coupon”, that is the dividend entitlement. Registered shares are kept in a register, the so-called. Share register guided.
Why do many investors buy stocks?
Shares are not only bought because of the dividend entitlement, which is usually over 4.0% for so-called blue-chip shares from Germany. They are also because of their "intrinsic value" and the Opportunity to increase in value Bought.
Shares are not traded at face value on the stock exchange, but at market value. This “price” of the share is the result of supply and demand and is subject to considerable fluctuations in some cases. Current prices are constantly determined for shares that are traded on the stock exchange.
On the stock exchange, 2 times 2 is never 4, but always 5 minus 1. You just have to have the nerve to endure minus 1.Stock exchange guru André Kostolany
How and through which factors supply and demand and thus the Price of a share determined is one of the big question marks that even stock market professionals are not immune to surprises. This is the biggest hurdle for beginners, because many are afraid to take the "wrong" course.
However, there cannot be the “wrong” rate if one regards stocks as an asset and thus as a long-term investment.
If you look at the Development of the German share index (DAX) since it was first calculated in July 1988, it has been found that the DAX has increased by more than five times from just under 2,000 points in 1988 to over 11,000 points in December 2016. This corresponds to an annual return of 19.3% . In contrast, if you look at the fluctuations to which the DAX was subject, there have also been negative returns in the meantime.
With regard to long-term investments, such as future retirement benefits, the growth in assets is significantly more than would have ever been possible with a pension insurance or an investment in secure government bonds. It should be noted, however, that one cannot always draw conclusions about the future from past developments.
What are the requirements for investing in shares?
If you want to invest in stocks, you need one depot and a Clearing account at a bank. There are various online banks that offer you free deposits. However, when choosing your custodian, you should pay attention to which one Order fees attack.
It is advantageous if the bank offers a demo account and a sample portfolio so that you can familiarize yourself with the trading platform before you use real money. This also allows you to experiment with different stock market strategies and get a feel for the price fluctuations.
Last but not least, telephone customer service can be of great importance. You can quickly and easily compare all online custodian banks operating in Germany via various comparison platforms and view test results. Take your time here and don't just choose the cheapest price. The overall package should suit you.
In addition to the deposit, you need money that you do not need now or in the long term, i.e. cash that you would otherwise save or spend in the form of insurance contributions. A. Tip against a rude awakening: A total loss can never be completely ruled out. Therefore, only invest amounts that you can bear in the event of a loss.
You can open a custody account at an online bank or an online broker relatively inexpensively. You can find a good overview on the Internet under the keyword Broker comparison.
Where are stocks traded?
Shares of listed AGs or KGaAs are sold to German and international Exchanges acted. In Germany, investors can trade on various stock exchanges such as Berlin, Stuttgart, Frankfurt, Tradegate or Xetra on weekdays. There are different fees here, which are usually listed by the online banks in the price-performance list.
There is also one for these securities over-the-counter trading. You can share about your Bank where you have the depot. This can be done online, by phone / fax or in person at your house bank. Trading via online banks is faster and usually significantly cheaper than with a branch bank. Trading is usually possible there between 8:00 a.m. and 10:00 p.m. on weekdays.
Which stocks are suitable for beginners?
The first time you buy stocks, this is the place to go DAX values Orientate yourself and initially concentrate on regions whose markets and economies you know better.
The 30 largest German companies listed on the Frankfurt Stock Exchange are listed in the DAX. They have the largest market capitalization and the highest stock exchange turnover on. These so-called "blue chip" stocks are a good starting point for beginners to get started trading stocks.
Who is strong for international markets interested, can also purchase foreign stocks. Here, too, you should initially orientate yourself on the “blue chip” shares that are listed in the relevant national index. In the US, the S&P 500 is a large index that tracks 500 large US companies.
Instead of buying individual shares directly, you can also buy into a Stock savings plan or invest in a share fund savings plan. A savings plan has that advantagethat you issue a one-time standing order that will be executed at the interval you have specified (e.g. once a month) on a specific day.
In the longer term, price differences when buying are evened out - you are not getting in at the "wrong" rate, but at the average rate.
How many stocks should you buy?
“Don't put all your eggs in one basket” - this is an old stock market adage. That means that you shouldn't bet everything on one share, but rather your share portfolio between different industries and possibly also regions diversify should (risk diversification).
However, beginners shouldn't get bogged down and buy too many different stocks so that they are still able to keep an eye on the development of their papers. There shouldn't be more than five to seven different titles at the beginning.
What are the first important steps before buying shares?
In principle, it makes sense to find out about general stock market events before buying shares. This can be done through books on stocks or the stock exchange, or with the help of the Internet and relevant magazines. In this way you get to know some basic rules and important terms. Stock exchange knowledge is important to be successful on the stock market in the long term.
One of the easiest ways to Identify interesting stocks is the view of one's own purchasing behavior. Which companies have you bought products from and would you do so again and again? Are these products simple and are there many people in demand? Are the products largely unrivaled or do they have an excellent reputation? Examples of such consumer goods manufacturers who are also broadly based are Nestlé, Siemens and automobile manufacturers. Successful innovations that you would buy yourself, such as Apple after the introduction of the iPhone, can be a starting point.
However, since share prices are by far not only driven by company performance, but also to a very large extent by the World events be influenced, you should hear, watch, or read the news regularly. Events such as elections or natural disasters can have a major impact on the share price, at least in the short term.
If you are for certain companies You should look at their share price development at least over the last twelve months, or even better three years. You should also take a look at the annual reports and news about the company and place particular emphasis on the future. Where are the main sales markets? Which external (also sovereign) influencing factors can influence sales and turnover in the future? A successful past is no guarantee of a successful future. If you think of the tobacco industry, for example, it is obvious that tobacco producers will have to open up new strategies and business areas in order to remain successful in the market.
Analyzes by experts provide initial indications of how highly the share is valued. The so-called Market capitalization is an indicator of whether the stock is already relatively expensive or not. Market capitalization is the product of the current market price of the share and the number of shares in a company that are freely in circulation.
Market capitalization = number of shares in circulation × market price per share
Market capitalization is therefore directly determined by supply and demand for the company's shares and is subject to corresponding fluctuations. It is an indicator of the market's expectations of the company's future profitability.
Shares of major shareholders are not taken into account, so the influence of their control options is not shown.
Key figures of business administration
Anyone who would like to deal more intensively with the company whose shares he or she would like to acquire should also look at some key business figures, such as the Cash flow, the level of indebtedness, the return on equity, etc.
However, good business indicators are no guarantee of an upward price trend. There are stocks that are permanently classified by experts and analysts as significantly undervalued, but whose prices are still not rising.
Price / earnings ratio
The Price / earnings ratio (P / E) of a share indicates the (estimated) annual profit per share (denominator) in relation to the current share price (numerator). It is often used as an assessment tool to determine whether a stock is "cheap" or not. The P / E ratio is only very high conditionally meaningful and should therefore be consumed with caution.
A low P / E ratio appears to imply a cheap stock. However, this is often a fallacy. For cyclical stocks such as automotive or chemical stocks, the P / E ratio can be comparatively low in boom times because the profits of the past are carried forward. Investors who rely on this metric to get in “cheaply” can experience nasty surprises when the seasonal boom subsides and stock prices fall.
How Much Money Should You Invest In Stocks?
There is no clear rule for this. Basically, you should only invest as much money in stocks as you don't need in the medium term.
Based on a general asset portfolio, around 25% to 30% should be cash, 5% to 10% physical gold and up to 40% real estate, leaving 20% to 30% for equity investments. However, this is an individual decision and cannot be answered correctly across the board.
Earning money with stocks: what are the investment strategies?
In principle, shares should be used to invest or build up assets. The planning horizon should be at least five to ten years and the invested funds should not be needed for anything else during this time. who Equity investments for old-age security may invest even over a period of 40 years. Especially for beginners, there is a continuous investment in stocks, for example via one monthly savings plan at.
Of course, you can also realize profits and reallocate assets during the investment period, for example if the previous investments have been successful and set goals have been achieved.
Speculation on the stock market
It cannot be denied that investing in stocks is also common too Speculative purposes is being used. The profits that can be achieved in the short term under certain circumstances sound tempting, especially for beginners. However, the often significantly higher losses that were realized on the stock market are often concealed by investors. Because of the many imponderables and influencing factors that affect stock prices, is beginners strongly discourage thisto speculate in stocks.
Fluctuations in the stock market
As the development of the DAX over the past 30 years has shown, long-term returns can be achieved with stocks that hardly any other investment can achieve. However, if you look at the strong fluctuations that have occurred during this period, it is essential to realize profits in between and reinvest the funds that have become free.
Warren Buffett has grown into one of the richest people in the world through stocks. In an interview he once said: “If you can't stand a loss of 50% or more, you shouldn't invest in the stock market”.
How often should you check the stock prices?
Ultimately, it is up to you how often you attend the courses. If you watch the prices daily, it can happen that you sell too quickly out of panic in the event of a short-term price loss. However, the course check should not be done too rarely. The rule of thumb is once a week. It can also be once a month.
Warren Buffett has a very clear opinion here too: he buys stocks and imagines that the stock exchange will be closed for the next five to ten years. So why check the courses every day? Similarly, André Kostolany, who recommended going to sleep for 20 years after buying shares.
Four Common Mistakes To Avoid When Buying Stocks
1 | Overconfidence (greed)
Many equity beginners make the mistake of relying on “hot tips” about which stocks can be used to achieve high returns and expect the “big hit” right away. It is all too human to want “more” and to believe that you have seen through the stock market, especially when the first successes are achieved.
Often, however, it is pure luck and the beginner (but also advanced) overlooks the fact that other titles may have even performed better. This leads to carelessness and hasty decisions. Pure luck is mistaken for one's own ability. This leads to unpleasant surprises.
However, mistakes in investing money with corresponding losses (hopefully) lead to learning from them. Paying the hardship is part of it and is the best engine to do better in the future.
Even if you cannot analyze every stock in detail, try to realistically assess risks and rewards against each other. You should define a realistic investment goal. So introduce Stock diary, in which you document which stock you bought, when and why.
2 | Lack of diversification
“Don't put all your eggs in one basket” is an old stock market adage. A portfolio should be sufficiently diversified to limit losses if necessary. If you own several different stocks from different industries and possibly also countries and if you have cyclical stocks but also stocks that are less sensitive to the market in your portfolio, you can limit your risks.
For example, in the early 2000s, many investors, including beginners, invested in "new market" stocks. After the bubble burst, many shareholders suffered heavy losses that led to a total loss.
However, diversifying too much into 20 or more stocks can lead to you losing track of things and recognizing undesirable developments in individual stocks too late.
3 | Wrong timing
Be careful to get in on a stock if it has risen sharply for a long time. There is then the risk that profit-taking will set in and you will incur a loss.
Stock exchange guru Kostolany once formulated the appropriate sentence: “You should never run after a tram or a share. The next one is sure to come. "
Finding the right timing to take profit is even more difficult. It is often said, "Let profits run". It is questionable whether this is still so unreservedly true in today's short-lived markets. You should sell stocks when you have achieved your predefined investment goal. It is more important, however, to limit losses and not hope that the trend in a stock will change in the short term. Here you should define a certain loss percentage at which you sell the stock.
There are different types of orders, such as stop-buy, where you only enter up to a certain price increase, or stop-loss, with which you sell automatically when you reach a previously defined loss.
4 | Too much back and forth
"Back and forth empties pockets" is an old stock market adage. Newcomers in particular often overlook the substantial ones Transaction costs and reallocate your portfolio too often and with little gains (or losses). This can ultimately lead to the bottom line in losses rather than gains. Here, too, a systematic approach in terms of your own stock exchange strategy helps.
Equity funds and ETFs as an alternative to individual stocks?
For equity beginners, equity funds can be a sensitive alternative. They are managed by asset management companies and make it for you to decide which individual stocks you should invest in.
Instead of stocks, you buy fund units and you can choose from the innumerable funds according to your own investment strategy according to various investment criteria, for example risk, country, sector, return-oriented or conservative. With this you can do the above mentioned Achieve diversification without investing more capital.
However, you should note that, in addition to the usual stock exchange fees, there are usually front-end loads and annual administration costs for buying and selling. In addition, fund companies claim up to 20% profit share annually.
The stocks are Special fund of the fund and do not fall into a possible bankruptcy estate, which offers a certain level of investor protection.
Exchange Traded Funds (ETF) are a cheaper alternative to equity funds. As a rule, they are passively managed and usually map an index, such as the DAX, the S&P 500 ETF, the EURO Stoxx 50 or the world share index. Here, too, you have the advantage of diversification and do not have to make an individual investment decision.
Image Copyright: Pavel Ignatov / Shutterstock.com
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