How to Invest in Stocks

Over the past decade, the European stock market has experienced steady growth, with average annual returns near 8%*. Despite recent market volatility caused by the coronavirus pandemic and international conflict, many experts believe that the long-term outlook for the European market remains positive. With a wide variety of companies to choose from with compelling valuations, investing in the equities market can be a great way to gain exposure to some of the world’s leading businesses. 

What are stocks?

A stock is a share of ownership in a publicly-traded company. When a share is purchased, you become a shareholder of that company and may be entitled to a portion of the company’s profits, known as dividends. If the company performs well, the value of your shares will increase, allowing you to sell them for a profit. Likewise, if prices fall, losses are typically incurred.

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How the Stock Market Works

A stock market is a collection of exchanges where securities are traded between investors. When people talk about the “stock market,” they are usually referring to major exchanges like the FTSE 100 Index or the NYSE. Publicly-traded companies have their shares listed on these exchanges, where they can be bought and sold by investors to raise funds for the issuing corporation. Companies will then use this money to finance operations, develop new products or services, make acquisitions, or return money to shareholders through dividends. As a business expands and grows more profitable, investors may benefit from appreciation of the price of each share.

However, if a company encounters difficulties, prices may fall and investors could lose money. Ultimately, it is the forces of supply and demand in the market that dictates the price of any security. 

Types of stocks

While there are many different types of equities, they can generally be classified into two broad categories: common and preferred stock. Common stock is issued by a company to raise capital and represents the most common type traded on exchanges. Common shareholders have voting rights and may be eligible to receive dividends, although dividend payments are not guaranteed. Preferred stock, on the other hand, typically pays regular dividends and has priority over common stock in the event of bankruptcy. Preferred shareholders do not usually have voting rights, but they may have the ability to convert their shares into common stock.

Another way to classify equities is by sector, which refers to the industries that companies operate in. For example, energy stocks are those of companies involved in the production of oil, gas, and other forms of energy. Healthcare stocks are those of companies involved in the research, development, and delivery of healthcare products and services.

Ways to invest in stocks

There are a few different ways to invest, with the most common method being buying shares outright through a broker. This can be done online or through a traditional brick-and-mortar brokerage firm. For investors who want more control over their investments, there are also a number of online platforms that allow for direct trading. These platforms typically have lower fees than traditional brokerages, but they may require a higher minimum deposit.

Investors can also invest indirectly through mutual funds or exchange-traded funds (ETFs). Mutual funds are managed portfolios that invest in a number of different companies, giving investors exposure to a diversified selection. ETFs, like the Franklin FTSE Europe ETF (FLEE), track a specific index, sector, or basket of stocks. ETFs trade on exchanges and can be bought and sold like other securities, making them a convenient way to access a diversified group of companies at a low cost.

Stocks can be held as long-term investments or traded more frequently, depending on the investor’s goals. For example, an investor who is saving for retirement may take a buy-and-hold approach, purchasing shares and holding them for several decades. The best long-term investment stocks are typically those of companies with strong fundamentals that are expected to grow over time. In contrast, an investor who is looking to generate income from their investments may take a more active approach, buying and selling more frequently in order to take advantage of short-term price movements. The "best" investment approach will vary from person to person, and depends on several factors such as investment goals, time horizon, and risk tolerance. 

The first steps of investing in stocks

Investing in the equities market can be a great way to grow your wealth over time. However, it’s important to remember that stocks are more suitable as long-term investments as their performance can be volatile in the short term. Before an initial investment is made, it’s crucial to have a clear investment strategy and understand the risks involved.

After determining your investment goals and risk tolerance, you can begin researching individual stocks or funds to add to your portfolio. When analyzing companies, pay close attention to its financial stability, growth potential, and valuation. You may also want to consider the company’s competitive advantages and future prospects.

Once you’ve selected the stocks or funds you want to invest in, the next step is choosing the account or platform you’ll use to make your trades. If you’re working with a broker, they can help you open an account and execute your trades. For DIY investors, there are a number of online platforms that offer trading including Schwab and TD Ameritrade. Before selecting a platform, be sure to compare fees, account minimums, and the features and tools offered as these can vary significantly.

Investors may also opt to hire a financial advisor or Robo-advisor to help with your investment selection and portfolio management. Financial advisors can provide valuable guidance when it comes to developing an investment strategy and making long-term financial decisions but typically charge a percentage of assets under management, so be sure to understand the fees involved before working with one. Robo-advisors provide similar services but use algorithms and technology to automate the investment process, which may help to keep costs low. These services can be a great option for investors who want professional help but don’t want to pay the high fees associated with traditional financial advisors.

Once a method to invest is chosen, you will need to determine how to fund your account and the regularity of your contributions. Funds can be added by transferring cash from a bank account or by selling investments held in another account. When selling investments, it’s important to consider the tax implications as capital gains taxes may apply. Contributions can be made on a regular basis through systematic investment plans (SIPs) or as a lump sum. SIPs are a type of investment vehicle in which investors commit to investing a fixed amount of money at regular intervals, which can help to reduce the effects of market timing and average out the cost of buying stocks. A stock investment calculator can then be used to estimate the value of your investment over time based on planned contributions, the expected growth rate, and the time horizon.

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Pros of investing in stocks

Investing in the equities market may offer a number of benefits including:

Growth potential. Over the long term, stocks have outperformed many other asset classes, providing investors with the potential to earn high returns. For example, the Financial Times Stock Exchange 100 Index (FTSE 100) has grown by an average of 7.2% per year since it was launched in 1984.

Diversification. By investing in a number of different companies or a fund that tracks a specific index, investors may help to reduce the risk of their portfolio as the performance of individual companies is likely to vary over time. This is especially important when investing in volatile markets as it typically helps smooth out returns.

Liquidity. Stocks are a highly liquid asset, meaning they can be converted to cash quickly and without incurring significant costs. This becomes more important if you need to access your money in an emergency or want to take advantage of investment opportunities as they arise.

Flexibility. Investing in the equities market gives investors the flexibility to choose how they want to invest. For example, investors can opt for a hands-on approach and make their own selections or they can leave it to a professional by investing in an actively-managed fund. There is also the option to trade online which usually offers a more affordable and convenient way to invest.

Low minimums. Most brokerages have low account minimums, making it easy for investors to get started investing. Many brokerages, like TD Ameritrade, also offer free commissions and partial shares, which can further help to reduce the costs of investing.

Inflation hedge. Over time, the prices of goods and services tend to increase as a result of inflation. This can erode the purchasing power of cash and fixed-income investments, but stocks have the potential to provide investors with a real return that outperforms inflation.

Cons of investing in stocks

While there are a number of potential benefits to this type of investing, there are also some risks to consider including:

Volatility. Prices may fluctuate significantly, which can lead to losses in a short period of time. In some cases, investors may lose all of their original investment if the share price falls to zero.

Market risk. The market can be affected by a number of factors including economic indicators, political events, and natural disasters. Recently, the Coronavirus and the international conflict between Ukraine and Russia have caused prices to fall significantly due to uncertainty and market panic.

Dilution risk. When a company issues new shares, the existing shareholders may see their ownership stake diluted. This can happen when a company raises money by selling new shares or when employees exercise their options.

Time investment. Managing a portfolio can be time-consuming, especially if you are actively trading. Investors researching single stocks will often need to monitor a number of different factors including the company’s financial statements, analyst reports, and the overall market conditions. This may not be suitable for busy investors or those with a limited amount of time to invest.

Tax implications. Capital gains taxes may apply to profits earned after a sale occurs. These can be significant, especially for high-income investors, and may eat into your investment returns.

The best stocks for beginners

Seasoned investors and amateurs alike are increasingly turning to low-cost, index funds to gain exposure to the market and mitigate idiosyncratic risk. Many have touted that index funds are one of the best investments for beginners because they offer a simple way to invest in a diversified basket of stocks with low fees. Index funds that track the S&P 500 Index, for example, provide exposure to large-cap companies such as Apple, Amazon, and Facebook. These companies have proven to be resilient over time and offer shareholders the potential for long-term capital appreciation. Not all index funds are created equal, however, and there are a number of factors to consider when choosing the right fund for your portfolio. The following are some important considerations: 

Cost. Index funds typically have lower expense ratios than actively-managed funds. This is because they do not require the same level of research and analysis, which can result in lower fees.

Index. The index that a fund tracks will have a direct impact on the performance of the fund. For example, a fund tracking the S&P 500 Index is likely to provide different returns than a fund tracking the MSCI Emerging Markets Index.

Dividends. Some index funds pay dividends, while others do not. Dividends can provide a source of income and may also have tax implications.

Minimum investment. Some index funds have minimum investment requirements, which can vary depending on the fund. For example, the (VEUSX) has a $3000 minimum.

Another option for beginner investors is to invest in a target-date fund. These funds are designed to provide investors with a diversified portfolio that is automatically rebalanced over time. The asset allocation will become more conservative as the target date approaches, which can be helpful for investors who want to minimize risk as they get closer to retirement.

New investors with less risk aversion may also consider investing in single stocks. While this can be a more volatile way to invest, it also provides the opportunity for greater returns if the price increases. When using this method, it’s important to consider the company’s financial stability, competitive landscape, valuation, and longevity. Coca-cola and IBM, for example, have both demonstrated an ability to withstand economic downturns and emerge stronger than before. However, it should be noted that past performance is not indicative of future results so careful research is still required.

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Final thoughts: Are stocks a good investment?

Investing in the equities market may offer a number of potential benefits, including the opportunity to earn income, diversify your portfolio, and take advantage of market growth. If you’re considering taking this approach to investing, it’s important to remember that success comes from taking a long-term view and staying disciplined with your investment strategy. Portfolio rebalancing, dollar-cost averaging, and tax-loss harvesting may also help improve investment returns, if done properly. While there are some risks to consider, such as volatility and market risk, adding shares of quality companies with strong financials can be a good addition to your portfolio if you have a long-term investment horizon and are comfortable with some level of risk.