Buying Stocks for Beginners At least since the stock market crash of the 21st century, stocks have not had the best image with small investors. If chosen correctly, however, they represent a solid form of investment that, unlike conventional savings accounts, offers good potential returns. The risk is somewhat higher, since stocks are generally subject to price fluctuations, but can be reduced by a long-term investment plan and a portfolio that is as broadly diversified as possible.
Not every small investor is considered a stock investor; some basic conditions should be met, including debt-free and a reasonably relaxed personality. If you want to buy shares, you have several options – a deposit with a direct bank is one of the cheapest and most convenient alternatives. The actual share purchase is comparatively easy on such portals.
Speculating in the stocks of individual companies is quite difficult, so beginners should rather fall back on funds with a broad risk diversification, such as index funds. In the past, these blocks of shares have proven to be a very safe form of investment.
Why should you buy stocks?
The topic of stocks is often difficult, especially in Germany. While ownership of shares is not uncommon in the USA, for example, many people in this country have reservations about the securities and hesitate to buy. Quite a few small investors think of terms such as stocks and the stock market first of all of the speculation and high risk – but not of a serious investment that can yield good returns, especially in the long term. But that’s exactly what stocks can do.
A share is not a casino chip (even if there are casino metaphors in the stock market language), but a stake in an existing company. Even if it only happens on a small scale: By buying shares, you become a co-owner of a stock corporation, receive invitations to the general meeting and thus theoretically have a say in company decisions.
Accordingly, you will be held accountable for both wins and losses. If the company is doing well, you will also benefit: the share price rises, your stake in the company becomes more valuable, and the annual profit payment in the form of a dividend may also increase. If the company is not doing so well, the price drops; if the company goes bankrupt, the share can even become worthless.
Basic rules when investing in securities
If you want to buy stocks, you should make sure to put stocks in a balanced mix of different companies, so diversify the portfolio. This reduces the risk of the investment.
If, for example, you rely exclusively on shares in energy companies, it can happen that your share portfolio loses massively in value if the energy industry is in poor economic conditions – not an unlikely scenario in view of the envisaged energy transition. Long-term investment is just as essential. The longer you hold stocks, the better the return prospects are, as the chance of making up for any short losses increases in the long term.
A case study by Deutsches Aktieninstitut shows why a long-term approach pays off: Let’s assume you own shares in the 30 largest German companies that are listed on the stock exchange – i.e. the companies that make up the DAX. With a 15-year term, such a system would have always been profitable since 1965 – regardless of when you got involved. It is of course not certain that this trend will continue in the long term – but it is very likely.
In contrast to fixed-income forms of investment, there is no return guarantee with stocks and a certain risk due to price fluctuations. However, the security of savings accounts, such as fixed-term and overnight accounts, is at the expense of returns. In phases of low interest rates, the interest rates for these types of investments are so low that inflation can just be offset.
Stocks can therefore be a useful addition to savings investments that allow you to build wealth instead of just holding it. However, if possible, you should not invest all of your assets in securities, but rather spread them over various forms of investment in order to keep the risk of loss low. You can find out more about diversification and the long term in the section “Which stocks to buy? Tips and Notes ”.
Before buying shares: analyze your own situation
Before you get into the stock market, you should answer a few basic questions for yourself. Because: Not everyone is suitable for stock trading. As a rule, stocks are only considered an investment if you:
- Don’t need the money you want to invest for a long period of time – at least ten years. The longer you keep the system, the safer it is.
- Are free from debt.
- Have a serene personality. Because the ups and downs on the stock market can be stressful, if you sell in panic at the first loss in value of your shares, you will hardly achieve any returns on shares. You must be able to withstand price fluctuations.
What type of investor are you?
A distinction is made between different types of investors in financial advice. Usually, these are classified into four risk classes, possible, but less common, are models with three or six classifications. The names of the individual risk classes vary in part, but ultimately the difference is only in the name. The investor type reflects an investor’s general willingness to take risks. This results in certain investment recommendations. Because not every form of investment is suitable for every type. For example, very security-oriented investors are generally advised against using listed values such as stocks.
Investor type: Safety Oriented Class
Investment objective: -Steady performance , -Secure income
Suitable forms of investment (example): Savings book, overnight money, fixed-term deposits, building society savings contracts, federal securities
Investor type: Conservative
Investment objective: -Higher returns , -Possible price gains
Suitable forms of investment (example): Pension funds, fixed income securities, corporate bonds
Investor type: Profit-oriented
Investment objective: -Capital Appreciation , -Income Above Normal Interest Rates
Suitable forms of investment (example): Equities of stable indices (e.g. DAX stocks), German and European equity funds & bond funds
Investor type: Opportunity oriented
Investment objective: Above-average yields
Suitable forms of investment (example): Stocks, derivatives, option deals
For security-minded and conservative investors, buying stocks is not recommended.
Profit-oriented investors should also consider longer-term equity investments in their investment strategy.
There are hardly any restrictions for opportunity-oriented investors. Occasional trading, i.e. buying and reselling securities within a relatively narrow time window, may be an option for them. You can find out more about this speculative and therefore very risky form of investment in the trading guide.
How and where to buy stocks
In order to be able to buy shares, you need a deposit in which your shares are deposited. So it is basically another account that you have next to your checking account, for example. You can open a custody account with direct banks and sometimes also with branch banks. Online brokers, which, unlike banks, concentrate exclusively on securities trading, also offer custody accounts.
Both deposit opening and deposit management can be done conveniently over the Internet, for example, with a direct bank or with an online broker. Due to stricter legal requirements and the resulting high consulting effort, many branch banks have withdrawn from the equity business for private customers. So your house bank may not offer a deposit. Depository providers also typically act as brokers, meaning they buy and sell stocks on your behalf. As a private person, you cannot trade on the stock exchange yourself, either online or directly from a location, for example, in Frankfurt.
Usually, these so-called orders incur fees, which can vary from provider to provider. In general, the fee per order for branch banks is higher than for online providers. Some online brokers offer a kind of flat rate that includes a certain number of orders. Most branch banks also charge fees for the custody account, while this is often available online free of charge. In one point, however, branch banks are usually superior to online competitors: They can offer individual advice, which can be particularly important for newcomers to equities.
Buying stocks online: an exemplary guide
After you have set up a custody account, it is time to actually buy the stock.
The following steps are usually necessary if you want to buy stocks online.
- First, you determine which stock you want to buy. Numbers identify shares. You need the six-digit securities identification number (WKN) for Germany or the twelve-digit ISIN number for international transactions. You can find the respective numbers on financial websites or in the daily newspaper.
- To determine the number of shares, divide the amount you are willing to invest by the current price of the preferred stock. Any fees for the order and the stock exchange, as well as bank commissions, must be included.
- Go to your online broker’s page, login and navigate to the securities purchase page.
- Here you select your securities account, enter the securities identification number or ISIN number and specify how many securities you would like to buy.
- In addition, you choose which exchange you want to use for the purchase. Note that both the price of the share and the fees for the stock exchange may be different.
- Now you have to specify how you want to execute the order: Cheapest means that the broker uses the next tradable price. Since you do not influence the rate, the Limit option is recommended here, especially for small investors. With this, you determine how much you would like to pay for one share. You can also determine how long your order is valid.
- The amount for the purchase of the share will now be debited from your clearing account, which is linked to your securities account.
Which stocks to buy? Tips and hints
The most important points for stock market beginners are the aforementioned long-term investment and risk diversification:
Spread your capital over as many healthy companies as possible, rather than just one. Ideally, it would help if you chose companies from different industries and from different countries – in addition to countries with stable economies such as Germany and the EU, papers from emerging countries with great growth potential can also be an interesting investment. In this way, price fluctuations are better compensated.
Create a sample depot
Some banks and online brokers offer sample portfolios with which you can playfully practise stock trading without risk. Look around the net for such offers.
Buying stocks for beginners: stock funds
If you would like to invest stock market values, but you find it too time-consuming to grapple with the markets actively, equity funds are usually a good alternative. A professional fund manager compiles shares that he expects to perform well into blocks of shares. You usually do not buy shares, but shares in these funds. The disadvantage of this stress-free form of securities trading is that the work of the fund manager must, of course, be paid for – these so-called actively managed funds, therefore, incur comparatively high fees.
So-called exchange-traded index funds, known as Exchange Traded Funds, or ETFs for short, are cheaper and, in particular, more understandable for beginners who are trading stocks for the first time. The composition of these funds tracks a stock market index such as the DAX. This means that if you own a DAX ETF, its value development is analogous to the price development of the DAX. Due to their diverse composition, index funds are considered a comparatively low-risk investment.
In addition, there are significantly lower fees for these passively managed funds. Since the index predetermines the composition, there is no need for an active fund manager to monitor the markets constantly and to react to changes with purchases or sales. Since the composition of the underlying index changes only rarely, securities are not sold too often, so there are only a few transaction fees.
Such ETFs are not only available for the Dax, but for practically all indices worldwide: The well-known S&P 500 index, for example, summarizes the 500 most important US companies, the Nikkei 225 the 225 most important Japanese companies. Furthermore, there are ETFs summarized for continents, sectors, the stock markets of second world countries, the so-called “emerging markets”, in English “emerging markets” and for companies worldwide. Among the latter, the MSCI World Index, which shows the development of over 1,600 stocks from 23 industrialized countries, is one of the best-known products.