Low-interest rates for money market accounts and savings accounts make shares attractive for beginners, but in addition to high returns, there is also a risk of losses on the stock exchange.
Are there safe stocks for beginners to minimize risk?
If you park your assets in a savings account these days, you’ll lose money when you consider inflation. For long-term asset accumulation, more and more people are therefore turning to the stock exchanges and looking for shares for beginners – even with little money who want to get started with an app and an ETF.
But the stock market also harbors risks. There are no safe stocks for beginners. Even newcomers have to consider the most important stock exchange rules from the start to secure a positive return in the long term.
Stocks for beginners explained: What is a Stock?
A stock is a share certificate. With a stock, an investor buys a share in a company with the legal form of a public limited company. With the purchase, the acquirer becomes a co-owner of a company. However, unlike shares in a partnership, shares are publicly tradable. Trading can – but does not have to – take place on an exchange. Companies issue shares in order to use the money raised to finance investments, for example. The stock market is, therefore, an essential source of financing for companies.
Are stocks a good investment?
Equity markets show a long-term upward trend, which ensures a high return. Before investing in stocks, however, you should be aware of the risks. After all, past developments are no guarantee for the future. Even if stocks have been a good investment in the past, individual stocks always carry the risk of a total loss. There are, therefore, no safe stocks for beginners.
Even a large and well-established company like Tesla can get into a tailspin due to management errors or a bad economy. The state stepping in with an injection of money is the exception. Diversification across different stocks, countries, and markets will therefore continue to be crucial for future success on the stock exchange.
Shares for beginners: with little money to the depot
Transaction costs are incurred when buying and selling shares, which reduce returns. You should compare the prices when choosing your depot and a cheap provider. When selling stocks, you must pay order fees to the bank or broker through which you transact. The amount of these fees differ from provider to provider. In addition, you pay taxes on all capital gains that exceed the flat rate (depending on your country) per year.
Opening a custody account used to be associated with high costs, but with the triumph of online banks and neo-brokers, the market has become much more customer-friendly. Investors can now get a free custody account from almost all banks and brokers.
But custody fees aren’t the only cost beginners need to consider when buying stocks. Many brokers also charge an order fee as a flat rate or as a percentage of the order volume.
Additionally, investors everywhere pay the spread. The stock exchanges finance their offer from the difference between the purchase and sale price.
What types of shares are there?
There are different types of shares: bearer shares, registered shares, common shares, and preferred shares. Here are the most essential distinguishing criteria:
- In the case of bearer shares, the stock corporation does not know its shareholders. The stock is not in the name of a specific person. It belongs to the owner. Therefore, the bearer’s share can be transferred informally. All rights attached to the stock are automatically transferred to the new owner with each transaction.
- In contrast, with a registered share, the joint-stock company knows the identity of each shareholder. In the case of registered shares, owners must be entered in the company’s electronic share register. Internationally, the registered share is the standard form of share. In the USA, for example, as a registered share. It is required in international stock exchange trading on some stock exchanges, such as the New York Stock Exchange (NYSE).
Registered stocks with restricted transferability are a particular form. The transfer of ownership depends on the approval of the respective stock corporation. Registered shares with restricted transferability are often issued to maintain an overview of the group of shareholders and protect a company from an unwanted takeover.
Common stock is when the owner has the rights provided for in the Stock Corporation Act. In particular, he has the right to vote at the general meeting and a right to the dividend if the stock company pays one.
In contrast, preference stocks do not confer voting rights at the general meeting. This waiver is rewarded with a slightly higher dividend. For example, Volkswagen distinguishes between ordinary and preferred shares, which most other public companies do not.
How are share prices formed?
The share price is the price at which a share is traded on the stock exchange. It is determined by supply and demand. There are several influencing factors on the supply and demand for a share and, thus, on the share price of a company:
Company news
Stock corporations must regularly report on their business development. Aside from these quarterly reports, they must report immediately on anything that could significantly affect the company’s value.
Example: A company announces that it will make a profit of two billion euros by the end of the financial year. If it becomes apparent over time that a product is not selling as well as expected and the profit will be far below two billion euros, the company must announce this ad hoc. Unexpectedly lousy news from the quarterly reports usually causes falling, if not crashing, share prices. Movements of more than ten percent in one day are common in such cases.
Industry news
There is always news that affects not just a single company, but an entire industry – and has a corresponding positive or negative effect on the companies in this sector. For example, if politicians decide on a purchase premium for new cars, the shares of car manufacturers tend to rise because sales expectations are increasing.
Economic expectations
Forecasts of future economic developments also regularly influence stock market prices. Some shares are particularly economically sensitive, such as shares in producers of cyclical consumer goods. Other stocks, on the other hand, are mainly dependent on the development of commodity prices.
Trends
Many investors follow technical analysts who extrapolate a trend from past price data. Regardless of this method’s viability, trend-hunting in the stock market affects prices. It can drive a stock price up or down.
When do I get paid a dividend?
Stock corporations pay a dividend once a year. Quarterly payments are standard in many other countries.
The general meeting, at which the (ordinary) shareholders are entitled to vote, decides on the dividend amount. The board of directors of the public company makes a dividend proposal, which is usually accepted.
The corporation pays the dividend from its profits. However, they are under no obligation to pay any dividend at all. You can also keep and invest the profit. The technical term for this is accumulation. The dividend will be paid out after the Annual General Meeting. The person in whose securities account the share is booked on the day of the Annual General Meeting is entitled to a dividend.
A portfolio of dividend stocks is also known as an aristocratic portfolio. Investors do not generate profits actively by trading stocks but passively by simply owning stocks. In a historical comparison, however, a purely aristocratic strategy is inferior to a diversified global portfolio.
Concerning personal liquidity, however, it makes sense to include dividend shares in your own portfolio because the dividends bring fresh capital into the coffers yearly.
Are there safe stocks for beginners?
There are no safe stocks for beginners. Investing in shares always involves the risk of losing your invested capital. However, there are basic rules that you can use to minimize your risk.
Invest broadly in stocks from different sectors.
The easiest way to achieve a diversified portfolio is through exchange-traded funds (ETFs), which passively track a stock index. Since no fund manager is required, ETFs are significantly cheaper than equity funds.
Brokers offer a wide range of ETFs that make diversification easy. Savings plans can also be concluded free of charge with these providers.
- Think long-term and only invest money that you can afford. The longer your investment horizon, the lower the risk that you will suffer losses with shares.
- As an investor with a long-term perspective, you must not and must not get nervous about short- and medium-term price fluctuations.
- You should always have enough liquid funds from other forms of investment to be able to sit out a possible stock market low or a crash. This way, you avoid selling your equity or equity funds when prices are unfavorable.
- Minimize the number of transactions. Any transaction that incurs a cost is a deduction from your return. Therefore, hectic buying and selling are private investors’ biggest enemies.
Do not trust the advice of self-proclaimed stock market gurus or prominent prophets. All the supposed trends and secrets that these gurus reveal have long since been priced into the markets when self-proclaimed experts try to market them on the Internet.
