While short-term speculative transactions allow for quick gains but also involve the risk of losses, a long-term investment aims to build up assets by day X. There is no one-size-fits-all strategy for pursuing this investment goal; rather, financial and investment planning must be tailored to the individual’s personal and professional starting point. The following questions need to be answered in advance:
What are my goals?
Be specific here. Wealth alone is not an investment goal. Set measurable goals. “I want to build up assets of 300,000 euros by retirement age” would be one such goal.
How much time do I have to reach this goal?
A thirty-year-old single mother with two children living in a rented apartment in the countryside may not be able to make her stocks work for very long because she needs an earlier payout to support the children. A thirty-year-old single in a paid-off condo may choose a longer investment period and probably leave his portfolio untouched over the estimated period.
What risks do I accept?
Some small investors are more risk-averse than others. Some relax by flying kites, while others get sick just thinking about it. There is no right or wrong here, but you should think deeply about your personal resilience and how to handle losses before developing your investment strategy. An interesting article on buying stocks has appeared on Homework that weighs the risks and rewards.
What do I need to do to reach my goals?
Even modest investment goals can’t be achieved overnight – unless you win the lottery. Now, unfortunately, the lottery ticket is considered an extremely unsafe investment option. It is more advisable to calculate with realistically expected returns from a long-term investment. A return of 4 percent doubles an amount of money in 18 years, a return of 8 percent shortens this period to 9 years. Fixed assets and time are the two relevant factors to be used in calculating the investment target. A short term requires a high capital investment; conversely, a long-term and ambitious investment goal can be achieved even with small assets, provided that several decades are available until the planned payout.
Where can I buy shares?
Before purchasing shares, it is necessary to open a securities account. Shares are deposited virtually in a securities account. A securities account can be opened at any standard financial institution. The fees for maintaining a securities account vary from bank to bank. It is best to ask your bank directly.
You can also open a securities account at direct banks and thus buy shares. Since direct banks do not maintain a branch network, they are often cheaper than traditional commercial banks. In addition, there are still so-called discount brokers. These are pure securities dealers who work only with investments. Discount brokers often do not charge any fees at all. A personal consultation is not offered however.
Beginners in the share business often prefer it despite the fees to be advised by the house bank for the mechanism of a depot and connect this with an investment consultation. Recent surveys indicate that young investors in particular are increasingly refraining from visiting their bank, as they fear that the advice they receive will be predominantly commission-oriented and prefer to find their own information on the Internet and in forums before starting to invest in securities.
Anyone who wants to use a direct bank or a discount broker must apply for the securities account online. In most cases, this is done using the Post-Ident procedure, as this is the only way to ensure sufficient legitimacy. A clearing account is opened at the same time as the securities account at the depository bank so that earnings and dividends can be booked. For payment, the profits can be transferred from the clearing account to one’s own current account.
A special form of online stock trading is day trading. This is the exploitation of price fluctuations that occur within a day. In principle, day trading is therefore normal stock trading with the difference that the securities are sold again in the course of a day and new ones are bought.
Another exclusively online traded financial product is binary options. These investments are extremely speculative objects and are therefore only conditionally recommended to beginners in securities trading – buying shares is a somewhat safer form. Binary options are classified as futures and have only been offered by online traders since 2008. The buyer bets on the occurrence of a certain event. If this event does not occur, the option becomes worthless. Bets are usually placed on falling or rising prices for shares, foreign exchange (see foreign exchange trading) or commodities.
What are the advantages of diversification when buying stocks?
If you focus only on stocks in a specific industry when building your portfolio, you make yourself dependent on the specific cycles of that industry. For example, technology stocks may collectively fall due to declining or low-yielding exports, while healthcare stocks rise for demographic reasons. At times, a majority of traded stocks fall while fixed income securities rise. Phenomena of this nature occur with some regularity. The best protection when buying shares is diversification.
Diversification is understood as an expansion of the product range. In the context of financial products, the term is used to refer to the risk distribution of an investment. The investment is spread over various forms of investment, shares and securities. This makes a total loss highly unlikely. Unfavorable developments in a single security are of little consequence and are often offset by countercyclical or anticyclical movements in other investments.
What distinguishes stock trading from other forms of investment?
On a statistical average, stocks achieve the highest return compared to other forms of investment. The return on an average stock is well above the rate of inflation. In the long term, shares yield a better return than an investment in real estate or other securities. This makes them particularly suitable for a long-term investment goal such as retirement provision.
When you buy a share, you are taking a stake in a company. The company is owned jointly by all share holders. Each share represents a share in the values and profits of the company. The shares of a company can rise or fall regardless of the economic situation. A good stock can soar even in a weak market, while the paper of a weakening company or one subject to countercyclical effects may well suffer losses despite a general economic boom. No direct conclusions can be drawn from the history of a stock as to its future performance. A glorious chart over many years may bode well for the future, but a rapidly changing market environment or strategic mistakes by the company’s leaders can also cause a temporary decline in the stock.
Stocks have proven to be a solid long-term investment. When the economy grows, corporate profits rise and so do stock prices. Since 1985, the German stock index has gained an average of 9 percent every year. This figure is unmatched by any other form of investment.
During an economic downturn or if the market collapses abruptly due to an overriding event, shares can indeed suffer significant losses in value. The psychological effect of the decline in value of a portfolio that has risen for years can shake even experienced investors. However, since an economic downturn is always followed by an upswing, the long-term increase in value is nevertheless maintained. In order to benefit from a dynamic bull market after a crisis, you have to have stocks in the fire and not sell them off hastily.
The world of the stock market can be confusing for a beginner, so thorough information and advice should precede any investment in stocks.