INVESTING IN SHARES: A BEGINNER’S GUIDE

A BEGINNER'S GUIDE TO INVESTING IN SHARES

We’ve all heard stories of people who support themselves - and sometimes get quite wealthy - solely on the income received from investing in company shares. In fact, there are businesses that have formed models around this idea. But how does investing in shares work? 

Nowadays, with technology and information so readily accessible, investing in shares for income has become easier than ever. The world of investing is not as intimidating as it sounds so learning the ins, outs and pitfalls are important. In this article, we will help guide you around the fundamentals of how to invest in stocks and shares.

Shares and bonds; public and private

Let’s start with shares. Basically, a “share”, also known as a stock, is a unit of capital representing full or partial ownership of a company to the holders of the share. Shares are a way to disperse the risk and responsibility of investing by using a larger collective of willing investors as opposed to only a handful.

Public market

Once a company decides they need the capital or funds to surpass what they could raise from private investors, it may be time to go public. Publicly traded companies are entities with shares of stock that can openly exist on a stock exchange, being sold or traded as pieces of company ownership. This enables a larger investment pool - the public sector - to buy shares, raise money, and add liquidity to the company instead of relying on what is usually a small circle of private, wealthy investors or venture capital groups.

Private market

Privately held shares have differed slightly from the public type as they used to be a bit more difficult to get. These shares are exclusively offered by the company to its angel investors, venture capitalists, employees, advisors. Such shares are not listed for public trading. Since they are private, the valuations of such shares are very intransparent. 

Private company stocks vary from publicly-traded stocks in multiple ways:

1. Unlike public stocks, private stocks don't have to be registered with the U.S. SEC, German BaFin or Luxembourg CSSF. That means private stocks aren't scrutinized by regulators, as are public company stocks.
2. Also, the private stocks aren't sold on a public exchange like the New York Stock Exchange, Deutsche Borse or Nasdaq. They're sold on secondary markets where it's not always easy to find a qualified buyer.
3. Private companies are usually significantly smaller than publicly-traded stocks, and thus have fewer shares to sell. That makes them less liquid than public stocks and thus often more difficult to sell.

Holders of private shares can make a significant return on their investment in case of an Initial Public Offering or a Direct Listing. 

BY DANIELLE MACINNES (UNSPLASH)

Funds over stocks? 

Choosing the right company to invest in, whether it’s a public or privately traded company, can be taxing. You need a good amount of research and macro/ micro economic understanding to choose the right bet. That's overwhelming for a lot of people. So don’t worry if that's not your thing. 

With a managed fund, rather than buying shares in a business you will buy units in a fund that’s managed by a professional fund manager who is responsible for investment decisions. In other words, someone else is deciding what investments to buy and sell and when the right time is to do it. This might be an option if you’re not confident with making your own investment decisions.

Investment funds are made up of investor groups that financially benefit from working together. A common fund type is called a mutual fund. It pools together the resources of multiple investors and assets to broaden their scope of investment opportunities. Another fund type is an exchange-traded fund (ETF). An ETF is a tradable security holding multiple assets active on the stock market. These assets can include stocks, bonds, currencies, or commodities such as gold or cryptocurrency. ETF differ from mutual funds since they are treated as a regular stock and traded throughout the day while not being actively managed from within by anyone. You can approach it with a “set-it-and-forget-it” attitude as they are considered passive investments.

Equity over debt

You may be thinking, “this is all great, but investing still involves risk. Why should I welcome that uncertainty? Especially in 2020?”. That’s a solid point. With markets worldwide taking quite a hit over the past few months and people out of work, putting faith in stock exchanges may seem unwise.

First, let’s look at how banks hold money. You put your money into a savings account through Bank ‘A’, and in return for your business, the bank slowly applies interest (annual percentage yield) over time. The major advantage of how this works is you can pull your money out at any point in time, as the bank’s only purpose is to hold your money - instead of you using a mattress. This makes it a safe option for holding your monetary nest egg since, in theory, nothing should ever happen to it and you can pull it out whenever you want.

But banks have slowed their annual percentage yield (APY) rates, especially for high-yield savings account programs. In fact, the best APY rates for high-yield savings accounts are not going far above 1% in 2020. This is a fraction of what we were seeing last year, where banks were offering rates closer to 2.5%. So your savings are not growing anywhere near the same rate it would when there isn’t a global pandemic going on. We can hope that the economy will bounce back enough to see these rates rise again, but it may take time considering the damage done.

The risk involved in equity investing is what makes the leap worthwhile. The fact that people are willing to essentially bet on a stock with their trust and money leaves them expectating to be eventually well compensated for that bet. Investing is actually a more sound way to save money over traditional savings methods. Even with down years, the stock market has still yielded annual return averages of close to 10% in the past century. Meanwhile, as mentioned before, APY rates for savings accounts have struggled to get anywhere near 3% - which is still a very ambitious benchmark for banks. 

How do shares actually make money?

There are two ways you can make money from investing in shares. One is through trading stocks. Let’s say you buy a share of company ‘X’ for a price of €10. If, over a certain period of time, that share price increases to €35, you sell that share on the market and you’ve made €25 on your investment. This is the most common way you hear about people making money on the stock market and it can become pretty lucrative. Another way to earn is through dividends. Companies will sometimes offer a piece of their profits to shareholders as payment for their investments. Usually this payout happens twice a year and the amount can vary, but it all depends on the company.

In order to make the most of potential earnings, it’s important to diversify your portfolio. This is important so you aren’t reliant on only one investment doing well. Don’t worry, it can take years to develop a robust investment portfolio, but more opportunities to invest will present themselves as you understand more about the market.

How do I buy in?

With what’s just short of a supercomputer in the palm of our hands, mobile applications and online platforms have lessened the need for brokers to tell you how to invest at fractions of the cost, time and difficulty. Online investment management software is now a commonplace business model and services are geared towards gently guiding your decisions. Some even go a step further to automate your experience. Applications can use algorithms and mathematical rules to determine the investment moves their clients should make, handing over the reins to the bots and limiting human interaction.

The rise of apps, such as Trade Republic, eToro, Revolut or Robinhood have made it a breeze to buy shares of publicly listed companies. It’s possible to start investing in shares with little money using these programs to get your feet wet, and build from there. You can also easily buy shares from high priced giants like Amazon or Facebook - if you have the disposable income for it - we’ll touch on that.

The same types of programs have made it easier for the average investor or share trader to buy into the private sector or participate in equity crowdfunding. Applications like Seedrs or Invesdor allow you to buy equity online from companies that are early stage and looking for funding. STOKR is a platform on which you can invest in private capital markets. Learn more here about how STOKR does it!

However, investing money in shares is not an easy way to get rich quick. It’s something that requires patience and a good understanding of market conditions and volatility. We don’t recommend you start blindly buying all types of stocks right at the beginning of your journey. But over time, smart investments and properly picked shares can double or even triple your savings. 

Risk factors of investing in shares

Understanding what you’re getting yourself into is extremely important, otherwise you could end up losing a lot of money. There are factors to be considered before investing in shares and questions you need to ask yourself. Here are some guidelines to reference as you get further into investing in shares.

• How much am I willing to invest?
• How long do I want to have my money invested?
• How many shares do I want to hold?
• Do I understand the future demand for the company I’m investing in?
• What are my ultimate goals?

Arm yourself with knowledge - We can’t express this enough. The more you know about investment strategy, the more you can rely on your own instincts and less on outside help. Do what you can to learn as much as you can about emerging markets and historical stock market behavior.

Properly set your goals. Do you have the disposable income to dive right in and spend thousands, or do you just want to get a feel for it? The differing answers to those two questions can determine which route you take as you begin learning how to invest - which services you decide to use, which companies you want to target and how long you intend to stay in the game. Knowing this beforehand is half the battle.

Know your limits. It’s never a good idea to become an over ambitious investor. That’s how you lose money. Prudently set your financial limits for how much you want to invest. A good rule of thumb is to limit stock percentage losses 10-15 percent in any shares you purchase. This is a responsible way to look out for your investment and your bank account. 

Manage your emotions. It may seem attractive to start selling if a recession is on the horizon, triggering your fight-or-flight mode with your investments. Keep a level head, avoid monitoring the daily market changes and don’t let emotions control decision making. At the same time, don’t try to be too opportunistic on dipping share prices due to a down economy. Being able to buy in at a cheaper market price due to a market in recession doesn’t always mean money will be made from it. 

Wrap Up

Investing in shares is not as hard as it used to be. With near immediate accessibility to information, the amount of emerging business on an exponential rise and online services making it easy for the everyday person to become an investor, you can start on the path to investing in shares today with a smartphone and an email address.

The financial barrier to investing has been lowered over the years. It is, however, up to you to find the broker services with affordable deposit amounts and the right investment strategy for either the short term or long term. Be smart with what markets you choose to invest in and do your research to best understand market trends and volatilities.

Key Takeaways

• The way to own a piece of a company is to buy shares. Shares are tradable assets companies offer as pieces to investors for either a reward or ownership rights. The value of those shares are determined by the performance of the stock markets.
• Over time, investing yields more returns than the generic way of saving, making it a better strategy for building a savings nest.
• As market share prices fluctuate, it’s up to the investor to keep a level head and make sound decisions. Shares can be worth hundreds one day, and drop significantly the next - being knowledgeable about market volatility will prepare you for this.
• Understand there is risk involved. If you are unable to or unwilling to take possible losses, wait until you are financially able to.

Did reading about investing in shares inspire you? To invest in innovative companies or to raise investments through the STOKR marketplace, follow this link.

BY DIAMAAN GUEYE